Windhoek-South Africa’s credit rating was yesterday cut to junk status by the ratings agency Standard & Poor’s (S&P) Global, a development that local analysts believe will inevitably have a contagion effect on Namibia.
The ratings agency said political upheaval, including the sacking of finance minister Pravin Gordhan, was endangering the economy. S&P also expressed concern over the nation’s debt situation and in particular the expense of backing state energy firm Eskom.
The news put more pressure on the rand, which fell two percent against the dollar on the back of the ratings downgrade. The sacking of Gordhan, widely seen as a safe pair of hands and with a reputation for financial prudence, also led to a four percent fall in the rand on Friday and prompted strong criticism of the Zuma administration.
Executive chairman of EOS CAPITAL Johannes !Gawaxab yesterday expressed fear that South Africa’s new credit rating would mean a weakened rand and, therefore, a weakened Namibian dollar. South Africa and Namibia are in the same common monetary area and the Namibian dollar is pegged to the rand.
“A weaker Namibian dollar means an increased cost of imported goods and services and it would boost inflation and put consumer spending under pressure,” he told New Era late yesterday.
This, !Gawaxab further explained,
would also result in increased vost of servicing foreign debts – especially for government, which is required to honour its obligations in foreign currency.
President Hage Geingob, speaking in London, England late last year, said Namibia needed a stable South Africa due to the closely intertwined nature of the two countries’ economies. He expressed confidence at the time that South Africa had enough ammunition in its armoury to fend off the advances of marauding economic and political instability.
“We are monitoring the happenings there, but we are not overly concerned. We need a stable South Africa, because instability there would negatively affect our regional integration ambitions as SADC,” he told European investors in December.
But in light of the wholesale cabinet reshuffle last week, which saw up to 15 ministers and deputy ministers ushered through the exit door, including the highly-rated Gordhan, !Gawaxab cannot see how Namibia will escape the spill-over effects of the latest rating.
“If inflation and outlook increase, the Bank of Namibia at some point would have to increase interest rates. This would result in increased mortgages, vehicle loans and anything bought on debt. That’s what these developments mean for the man on the street,” observed !Gawaxab, formerly the CEO of Old Mutual’s African operations.
“For government, the cost of borrowing will increase and the money we are paying back will be more. This could result in having less money for social spending. For local commercial banks, whose credit systems are tied to South Africa, they too are set to be under pressure, as most companies will see the cost of capital increasing.”
Gordhan’s replacement as finance minister by Malusi Gigaba was part of a cabinet reshuffle by President Jacob Zuma on Thursday night, but the deputy president ruling of the African National Congress, Cyril Ramaphosa, called Gordhan’s sacking “totally, totally unacceptable” and ANC secretary-general Gwede Mantashe also opposed it, according to press reports.
The downgrade is likely to make it more expensive for South Africa to borrow money on the international markets, as lending to the country would be seen as riskier than before.
“Internal government and party divisions could, we believe, delay fiscal and structural reforms and potentially erode the trust that had been established between business leaders and labour representatives (including in the critical mining sector),” S&P said.
“An additional risk is that businesses may now choose to withhold investment decisions that would otherwise have supported economic growth,” they added.
The agency also raised concern about the level of borrowing by state energy firm Eskom. The government guarantees N$350 billion rand of Eskom’s debt, equivalent to about seven percent of the nation’s economy.
Gigaba the weekend spoke at of plans to “radically transform” the country’s economy. While he has a track record of policymaking, most recently as home affairs minister, he lacks a background in economics and finance. That fact prompted criticism that Gigaba – who told ENCA news that he does not ask questions, “I simply comply with the instructions” – is too inexperienced for the job South Africa’s economy expanded by 0.3 percent in 2016, compared with 1.3 percent in the previous year. Moody’s is due to make its latest pronouncement on South Africa’s credit rating on Friday. It currently has the country two notches above junk status.
– Additional reporting: BBC