SA’s sneezing fit gives SADC a headache

SOUTH Africa’s ratings downgrades by S&P Global and Fitch Ratings will lead to an economic slowdown in neighbouring countries, whose fortunes are closely linked to those of the regional giant.

Analysts say the latest economic headwinds in South Africa brought on by the credit ratings downgrades could destroy the “green shoots” that had been emerging in members of the Southern African Development Community.

The region is expecting bumper harvests after recovering from its worst drought in 40 years and apparently seeing off threats to agriculture posed by pests such as the fall armyworm.

It has also benefited from a mild recovery in commodity prices, and was hoping to share in the improved growth of 2.9% (up from 1.5% last year) that the World Bank had forecast for sub-Saharan Africa this year.

But these hopes have dimmed amid fear of recession in South Africa in light of the credit downgrades this month that followed President Jacob Zuma’s firing of finance minister Pravin Gordhan.

South Africa contributes nearly 70% of the 15-member SADC’s GDP.

Johannes Möller, president of Agri SA, said this week that the full impact of the creditratings downgrades was still uncertain, but it would be short-sighted not to expect that it would have an impact on the region.

Botswana, Lesotho, Swaziland and Namibia are also linked to South Africa in the Southern African Customs Union, making them particularly vulnerable.

A key feature of the customs union is that members either transact in rands or peg their currencies to the rand.

The rand’s weakness to the dollar — it has fallen 11% in the past two weeks — bodes ill for customs union members, which have seen their own currencies weaken.

BMI Research said the impact would be to increase the outstanding value of foreign debt in local currency terms.

“Foreign currency denominated debt constitutes over 30% of Namibia and Lesotho’s total debt load,” BMI Research said in a report laying out possible scenarios for customs union members following the South African downgrades. The external debt holdings of Namibia and Lesotho were likely to rise as a percentage of GDP.

BMI Research said the downgrades would result in bond yields rising for customs union members.

“This would drive refinancing costs higher and would add further pressure on these countries’ fiscal positions, raising risks for Namibia’s credit rating in particular given it is one notch above junk status and on a negative outlook,” the report said.

Some economists fear that South Africa’s regional dominance means that if it sneezes, all of SADC will catch a cold.

Azar Jammine, chief economist at Econometrix, said the “big danger” was that all three global ratings agencies — S&P, Fitch and Moody’s — could classify South Africa’s bonds as subinvestment grade.

“In the event that that occurs, South Africa’s participation in the World Governments Bond Index will have to be terminated,” Jammine said.

“This could lead to huge sales of South African government bonds by foreigners. Sales of such bonds would lead to a huge outflow of capital from South Africa, causing the rand to plunge, inflation to rise sharply and short-term interest rates to rise,” he said.

The effects would be felt far beyond South Africa’s borders.

S&P and Fitch both downgraded South Africa’s foreigncurrency debt to junk. Fitch also downgraded local-currency debt.

Mike Schussler, director of Economists.co.za, said this would make it difficult for other countries in the region to maintain or improve their credit ratings, given that South Africa was seen as the benchmark.

“In the short term, the downgrade will hit consumer and business confidence,” Schussler said.

“Its full impact will not be felt for six to nine months and will be seen in any new regional projects that were set to be rolled out being halted.

“Many South African banks and companies are doing business in SADC ... now these banks and companies are going to pay more for capital and the money they need has become more expensive.” Schussler said that regional growth was likely to slow.

“As the biggest economy in the region, [South Africa] will impact on the customs union . . . Those countries will feel the impact of a weaker rand on their economies while migrant workers’ ability to repatriate earnings, be it either to Zimbabwe or Mozambique, will be reduced,” he said.

Despite South Africa’s economic woes, it is unlikely that any of the other SADC countries will take over its role as regional economic powerhouse. Angola and Mozambique, which have posted economic growth rates of above 5% in recent years according to World Bank data, have since gone off the boil.

Given the region’s reliance on the South African economy there appears to be little scope for SADC to put any pressure on South Africa’s politicians to follow policies that are more conducive to stability.

“I don’t think the region has that much influence,” said Keith Jefferis, a former deputy governor at the Bank of Botswana and a consultant at Econsult Botswana.

“The forums such as SADC and the customs union share information, they don’t interfere with each other’s domestic policies.”

This could lead to huge sales of government bonds Its full impact will not be felt for six to nine months