SA’s credit rating has consequences on Zim
SOUTH Africa (SA) escaped a credit downgrade from rating agencies Moody’s and Fitch last week and may also receive a pass mark from Standard and Poor’s (S&P) today, despite high expectations of a downgrade.
However, the rand is expected to remain under pressure as the likelihood of a downgrade in the short to medium-term is very high, negatively impacting Zimbabwe’s economic prospects. SA is rated a notch above “junk” status by both Fitch and S&P and two notches above that by Moody’s.
Slow growth in Africa’s most advanced economy and political uncertainty has heightened the risk of a credit rating downgrade in recent months. The economy is expected to register a mere 0,5% growth in 2016 following a protracted period of low commodity prices. SA relies on mineral commodities such as gold, platinum and aluminium.
China’s slow economic growth and the possible normalisation of US interest rate monetary policy have affected commodities in particular and commodity-driven economies in general.
Angola and Nigeria, which rely on oil, are experiencing a sharp slowdown in economic activity and budgetary constraints. Zambia had to go the International Monetary Fund route after a sharp dip in copper prices.
A SA credit rating downgrade to junk status would add more pressure on the rand, negatively impacting Zimbabwe’s economy. An appreciation of the rand will be ideal for Zimbabwe to restore the manufacturing sector and other productive sectors’ competitiveness.
In the latest monetary policy decision by the SA Reserve Bank, the authorities left the repo rate unchanged at 7% and prime lending rate unchanged at 10,5%, but warned of the possibility of a credit rating downgrade due to low economic growth. A credit rating downgrade and an interest rate hike by the US Federal Reserve may see the rand depreciating sharply. In the run up to the Fed’s first interest rate hike, the rand depreciated by as much as 18%, highlighting some of the economic weaknesses of Zimbabwe’s largest trading partner.
Zimbabwean firms and the economy at large should strongly and quickly consider adopting the rand as the reference currency within the multi-currency system to ensure sustained competitiveness. The tourism sector should be quick to adopt the strategy or have a dual pricing system. Over 80% of Zimbabwe’s tourists come through our southern neighbour. A weaker rand makes the Zimbabwean market expensive to holders of the rand.
Furthermore, a weaker rand increases the appetite for imports, which will impose more competition to local production. Weak domestic demand and high appetite for imports as a result of a weaker rand has over the years rendered the manufacturing sector uncompetitive. The authorities are therefore urged to closely monitor the developments in SA and implement necessary policies and reforms for the economy to remain competitive.
A weaker rand may also depress the dollar value of remittances. Zimbabweans, especially in the southern districts of the country, rely on SA for both remittances and employment. A weaker rand, therefore, reduces the dollar value of remittances and makes SA a less preferable destination for Zimbabweans.
Furthermore, the S&P has downgraded the credit rating of SA’s power utility. Traditionally, rating agencies used to first publish rating reviews of government enterprises and parastatals before the economy’s broader review. A downgrade of a large government enterprise may be a warning to the wider economy. Eskom’s downgrade poses risks to Zimbabwe, which relies on imports to augment its electricity supply. A downgrade reduces Eskom’s ability to source cheaper funding, increasing its costs which will then be transferred into its pricing. This may entail a hike in electricity tariffs in the short to medium-term or a cut in supply.
With Zesa owing Eskom huge amounts in unpaid electricity supply, Eskom may change its selling model to a more cash basis which will further negatively impact Zimbabwe. Given the current liquidity challenges, foreign payments gridlocks as a result of nostros depletion, the authorities are urged to closely monitor the situation before it develops into a full crisis.