SA’s junk status won’t affect Nam – experts

By Magreth Nunuhe

WINDHOEK – Economic experts say that South Africa’s credit rating downgrade to junk status is not likely to create instability in Namibia’s financial system as the country has to a large extent insulated itself from that country’s economic woes.

“Although Namibia and South Africa share a great deal of similarities, Namibia’s recent financial system stability report or review shows that its financial system remains sound and stable making it more resistant towards external shocks.

It’s also too early to tell, but if any impact at all, it will be after a long period once Namibia has exhausted all its ammunition to defend its system,” said Mally Likukela, Twilight Capital Consultants managing director.

Shaun Namaseb, Capricorn Asset Management portfolio manager, shares similar sentiments saying that he did not expect much by way of instability in the local economy apart from volatility in the Namibian dollar as a result of being pegged to the South African rand.

Global ratings agency Standard & Poor’s (S&P) downgraded South Africa to junk status or sub-investment grade on 3 April 2017 – a first since 2000 – after a huge Cabinet reshuffle by President Jacob Zuma, in which Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas were dismissed from their ministerial positions.

South Africa’s downgraded junk status means that their ability and willingness to repay their debt will at best be viewed with suspicion and would dramatically increase the interest rate at which the South African government and companies lend, and interest rates.

A non-investment grade also means a country has a higher risk of being unable to honour its debt commitments, which results in investors requiring higher compensation for the risk taken.

As a consequence, interest rates would also rise for the ordinary person, which may lead to an increase in bad debts, insolvencies and even bankruptcies.

Investors would, accordingly disinvest in South Africa because in many cases investors are prohibited from investing in countries with a junk status credit rating.

With the looming uncertainty and fears because of South Africa’s downgrade, some experts have predicted that it could also have dire consequences and substantial financial implications on Namibia in terms of attracting investment and knock-on effects with higher inflation and interest rates because of the country’s economic dependence on South Africa.

Likukela argued that even though Namibia’s financial markets are linked to South Africa such that the shocks are transmitted over to Namibia instantaneously, the structure of the country’s market, that is the low liquidity and rigidness in prices, the impact will be felt but at a very minimal level and not strong enough to disrupt our financial system.

“The only present fears at the moment are with regards to the exchange rate volatility and its likelihood to result into capital outflows,” he said.

Namaseb is convinced that the benefits of the Namibian dollar being pegged to the South African rand do outweigh the cost, as financial linkages with South Africa are strong.

“Pursuant to that, a link with the South African rand provides a currency stabilisation mechanism which would be easily manipulated for a small economy such as ours,” added Namaseb.

Namaseb is of the view is that the rand has been oversold for some time and fundamentally “we should see some strength from the currency”.

“We don’t believe that the current political climate in South Africa will lead to a sustained weakness in the South African rand. As a result, the inflationary pass through mechanism from any potential currency weakening may be benign,” he said.

Namibian economic experts are still adamant that Namibia would not necessarily be impacted purely on a technical point as it does not hold an S&P credit rating.

They believe that Namibia would be able to hold on to its investment grade rating in the short-to-medium term and it is therefore completely unjustified and not backed up by facts that a South African downgrade would cause financial instability in                                                   Namibia.

However, in terms of attracting investment and effects on higher inflation and interest rates, Likukela is of the view that investors usually view Namibia in the same lenses with South Africa and so the outlook of Namibia’s economy will be influenced by the downgrade.

“Although investors won’t completely avoid investing in Namibia, they will rather decide to delay or hold investments while they monitor and assess the situation in South Africa.

“Of course, this has potential to hold back economic growth, but it’s better than a complete withdrawal of investors,” he reckoned.

Likukela pointed out that the exchange rate fall-out from the downgrade would have a negative impact on inflation as imports become too expensive, trigger interest rate hikes that will be aimed at controlling inflation and higher repayments costs for both government, corporations and individuals. – Additional information:

April 2017
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