Does Namibia stand to benefit from South Africa

By Kelvin Chiringa
August 2016
Prime Business

The economic turmoil bedeviling Namibia’s neighbor down south took its firm grip as rating agencies Standard and Poor; and Moody’s set June the 3rd as the day South Africa would be rated, and was seen by  many economists as the inescapable “Black Friday” and sentiments were high that Namibia would feel the heat.

The booting out of Finance Minister Nhlanhla Nene by President Jacob Zuma, a slowing economy, an unstable political environment and other factors saw South Africa’s economy steering into a dark period of uncertainty.

The media in turn reacted with such a frenzy which forecast a possible down grade of South Africa’s sovereign credit rating into the dreaded junk status and matter-of-factly, everything pointed in that unflattering direction.
Being a part of the Common Monetary Area (CMA) means a downgraded South African economy would have a domino effect of casting a negative outlook upon Namibia’s economy.

 Yet, contrary to common perception before the judgement day of the 3rd of June,  South Africa managed to dodge downgrades earning a BBB- rating from Moody’s which reflected low GDP growth, significant fiscal and external deficits coupled by high debt levels which, however, got balanced by deep local capital markets, a favorable government debt structure and firm policy institutions.
Standard and Poor stuck to its BBB rating and the South African government earned a six month grace period to put its house in order to escape from slipping deep into the abys of junk status towards year’s end.

But does this grace period and escape from the junk rating mean anything significant for Namibia’s economy, whose currency is pegged against the Rand and is there a reason to take a breather once again and cross our fingers over South Africa steering its ship out of another possible storm by all means?
“Due to the fact that our interests rates are more or less benchmarked over South Africa’s, what generally happens with downgrades is that they would go up and also the currency would tend to devalue but that had already happened in anticipation of a downgrade, so the fact that it was not downgraded is a positive things for us,” says James Cunning of Quest Consultancy.

New South African Finance Minister, Pravin Gordhan  welcomed Moody’s rating as a wake-up call to unite behind a sick economy in order to bring out optimal results by the turn of December.

“We are not saying that this is the end of the road. It’s the beginning of a new period of working as a team among ourselves,” the minister is quoted as saying

Yet the unexpected Brexit will surely come in hard to muddy the whole picture of South Africa possibly surviving the December rating of its sovereign status, and although this may not translate to Namibia being left in the latrine of junk status since the country is rated independently, chances are high the economy will feel the pinch.

 “Namibia is at the mercy of South African ratings to an extent due to our close linkages. We have seen the effects coming in already from  its slow growth, so if  it goes into a recession (after the six month grace period), we will certainly feel it in terms of demand for our exports,” says Cunning.

He goes on to say that the fact that South Africa was not downgraded is good for Namibia in terms of interest rates and a possible sustained Rand stabilisation would translate positively to the local dollar, which casts a picture of certainty in terms of inflationary outlook.

However, the rating from Standard and Poor; and Moody’s per se does not inspire much confidence as South Africa hangs precariously a notch above junk status.

Pessimistic sentiments are still high bordering on the possibilities of a downgrade come December and this invites the question, does Namibia still need to hold its breath just as it did prior to the 3rd of June rating?
Yet, according to Cunning, if South Africa gets a negative rating the biggest blow would land on Namibian business activity with regards to investment from that country but the possibilities of a downgrade after the grace period would be slim.

 “Unless there is some major political mishap I do not expect South Africa to be downgraded, if it was not downgraded on the 3rd of June it is likely that it won’t be downgraded in December, most of the risks are mostly external in terms of global happenings like Brexit and Italy which is not also doing well with its banks in a poor state, but on a relative basis South Africa will be able to maintain its standing in terms of the investor perceptions,” reiterates Cunning.
According to Dr Michael Humavindu of the Ministry of Industrialization, the danger of leaning on the South African economy is a phenomenon that needs to be cautiously factored out of the whole equation to avoid red lights that come with such a crisis.

Nevertheless, Dr Humavindu underscores that the approach has to be cautiously and meticulously executed by finding the answer in economic diversification.

“I think the biggest challenge for us really is to push our trajectory towards diversifying our economy. Now, this does not mean we have to entirely wean ourselves off South Africa. We just need to find more and more economic factors, projects or entities to bolster economic growth,” says Dr Humavindu.

 Dr Humavindu further reflects that it would indeed come in time to cushion the shocks of external forces coming from down south from whence Namibia has had a close a relationship for a long time.

Yet Namibia is faced with the urgent question as to how long will the country remain pegged against the Rand and by when can the leadership begin to take significant strides towards removing the over-reliance on South Africa.

“I think we will be lying to ourselves if we say we are going to diversify completely and comprehensively away from South Africa in the next ten years, diversification means we make sure that we are able to grow the sectors that are going to dismantle that over reliance on South Africa or SACU,” says Humavindu.
This invites to the discourse the very question economists have been of late debating about which is whether it is time Namibia came out of the common monetary area or not.

“Maybe we do not really need to be in the common monetary area, maybe we need to move away closer to DRC or China, while we seek other channels, I will have to warn that we need not to have an abrupt withdrawal,” he says.