Economic downgrade to hit SACU revenues

By Timo Shihepo

WINDHOEKTHE Southern Africa Custom Union (SACU) says it is worried that the recent economic outlook downgrades for some of its members could be damaging and could result in low earnings from the customs union’s revenue pool.

International rating agencies, including New York-based Fitch Ratings, have downgraded economic outlooks for Namibia, Botswana and South Africa to negative, and the customs union has called for a common approach to prevent the situation from worsening.

Earlier this year, the Standard & Poor’s Ratings Services (S&P) revised and downgraded the economic outlook for Botswana and South Africa to negative from stable, with the latter narrowly avoiding junk status.

Last month, Fitch Ratings downgraded Namibia’s economic outlook from stable to negative.

This spells trouble for member states, especially when proceeds from SACU’s Common Revenue Pool (CRP) are plummeting. Namibia, for example, is expected to see a 25-percent drop in SACU revenue from R17.1 billion received in 2015/16 to R12.9 billion during the 2016/17 financial year.

In the 2014/15 financial year, member states shared R88.4 billion with South Africa taking the lion’s share of R36.7 billion from the pool. Botswana took the second largest share (R19 billion) and Namibia third (R18.1 billion).

According to the SACU revenue sharing formula, South Africa gets the biggest portion (48 percent) followed by Botswana (18 percent), Namibia (15.7 percent), Swaziland (9.7 percent) and Lesotho (8 percent).

South Africa receives the largest share because it influences the direction of trade within the customs union, as all the other members import more than 80 percent of their goods and services from that country.

CRP for the 2015/16, in terms of customs and excise duties, was R84.24 billion, whereas for the 2016/17 financial year, it is projected to increase to R85 billion.

SACU Communication Manager, Kungo Mabogo, told The Southern Times this week that there is trouble brewing in SACU, and cautioned member countries to avoid poor credit rating.

“Generally, poor credit rating or negative downgrading impacts the affected countries through dramatic increase in the interest rates at which the government and companies borrow funds. Interest rates will also rise for the man on the street. This can lead to an increase in bad debt, and even bankruptcy,” she said.

She added the the economic performance of members states will determine the overall size of the SACU Common Revenue Pool. “This implies that if the member states registered a low growth rate due to low investment inflow and high inflation, this will translate into low revenue collections, which in turn affect the revenue shares due to member states. In turn, the members will have to finance the resultant budget deficit through higher borrowing cost.

She urged SACU countries to pursue corrective and prudent macroeconomic policies to avoid credit downgrading.

Mabogo added that another negative aspect resulting from poor credit rating is capital flight, where investors pull their money out of a particular country. This happens, especially with institutional investors like pension funds, whose investment policies prohibit them from investing in countries with low credit rating.

The capital outflow will in turn drastically weaken the domestic currency, in this case the South African rand, which will result in higher inflation and interest as well as higher cost of borrowing.

She added that the poor credit ratings will not have a direct impact on the operations of SACU as an institution. Although the secretariat’s activities are financed through the Common Revenue Pool, its operational budget is predeterimed before the members share the revenue.

But in the event that the poor credit rating results in higher capital flight and depreciation of the local currency, this could negatively affect activities such as the SACU Secretariat’s travelling budget, as such costs are denominated in the US dollar, Mabogo warned.