South Africa is not the only country that will take a beating if its credit ratings slip deeper into junk territory.
Neighbouring states, particularly those that form part of the South African Customs Union (Sacu), will also feel the pinch.
The customs union, which comprises South Africa, Botswana, Namibia, Lesotho and Swaziland, allows an unrestricted flow of goods and services between them, and customs and excise revenue, based on a formula, is shared. This income forms a large party of the government revenues of Botswana, Lesotho, Namibia and Swaziland (BLNS). The funds are dispensed through the South African National Revenue Fund.
A further decline in South Africa’s credit rating will affect the country’s economic growth and inflation negatively, and indirectly those of the BLNS countries, said Gerrit van Rooyen, an economist of the advisory firm NKC African Economics.
Lower investment and higher debt costs for South Africa as a result of the downgrades will weigh on its economic growth, which in turn “will weigh on bilateral trade with the BLNS countries, Sacu revenues and consequently the BNLS growth rates and national budgets”, he said.
In 2016-2017, this income, as a percentage of fiscal revenues, amounted to 26% for Namibia, 20% for Botswana, 32% for Lesotho and 38% for Swaziland.
“This means that the BLNS countries are very vulnerable to declines in the level of customs collections, which depend on regional economic growth,” he said. “The downgrades jeopardise South Africa’s expected modest growth recovery and, hence, the expected recovery in Sacu revenues.”
In the February budget, the South African treasury estimated that Sacu payments for the 2017-2018 year would be in the region of R56-billion, rising to R62.4-billion in 2018-2019 and R64.5-billion in 2019-2020.
A further downgrade will cause rand weakness, keeping South African inflation high. Because of the close relationship between the rand and the BLNS currencies, this will increase inflation in those countries too, he said.
Lesotho’s loti, Namibia’s dollar and Swaziland’s lilangeni are pegged one to one with the rand, and Botswana’s pula is pegged at 45% to the rand, Van Rooyen said. The majority of these nations’ imports are from South Africa, so increasing costs in South Africa would also fuel higher inflation in those countries.
Swaziland is likely to be the hardest hit if Sacu revenues decline, he said. They are expected to fund about half its 2017-2018 budget.
This could spell an increase in the kingdom’s government debt, which could lead to tax increases and expenditure cuts and hamper growth, he said, adding that more than 80% of its imports come from South Africa.
But it could be argued, Van Rooyen said, that Namibia might lose the most if South Africa’s debt continues to be downgraded. Namibia has investment-grade credit ratings from both Fitch and Moody’s, at BBB- and Baa3 respectively. In both cases, this is just one notch above subinvestment grade. But these ratings had already came under pressure before South Africa’s downgrade. Both agencies had revised their outlook from stable to negative towards the end of last year, Van Rooyen said.
The change in outlook reflected a slump in economic growth from 6.1% in 2015 to 0.2% in 2016, a wider-than-expected budget deficit in 2016-2017 and “ballooning public debt”, which has risen from 15.7% of gross domestic product in 2010 to more than 40% of GDP by the end of 2016.
“If South Africa continues to suffer further downgrades, it is inevitable that Namibia, owing to its linkages with the South African economy and financial markets, will also lose its investment-grade credit rating,” he said.
“Namibia may not to be as resilient to a downgrade to junk status as South Africa, because its economy is comparatively less diversified and its financial markets and revenue agency are not as well developed.”