SACU under threat as S/Africa sneezes

By Mpho Tebele

Gaborone- Southern African Customs Union (SACU) member states economies are facing a major risk due to the under performance of the South African economy, economists warned here last week.

The performance of the South African rand is closely watched by its trading partners, in Southern Africa, where the country dominates trade.

The Rand has been he worst-performing emerging-market currency over the past week, with a loss of 9.7 percent against the dollar.

Standard Chartered Bank’s head of economics (Africa), Razia Khan said 2017 was supposed to have been a year of recovery.

Speaking at a global market forecast meeting in Gaborone, Khan noted that “Botswana had had been through a lot, the Southern Africa drought had weighed on prospects across the region.”

South Africa, is the region’s biggest trading partners and a major source of imported goods into the domestic economy, is reeling from the news of the decision by Standard and Poor’s (S&P) and Fitch to review their outlook.

Reports indicate that Fitch has downgraded South Africa’s economy from BB+ to BBB- with a stable outlook.

Ratings that fall beneath BBB are considered speculative or junk, meaning the country is less creditworthy to lenders and less attractive to investors.

Khan observed that investor confidence in South Africa had been risked by the recent cabinet reshuffle. She is of the view that this is not helped by the fact that there was no assurance from the treasury office.

The change in the leadership of the South African treasury has also had an impact on the country’s currency, the rand, which traded weaker against major currencies over the past week.

She said there is no doubt that if South Africa’s economy underperforms it would definitely impact negatively on trade in Southern Africa which will in turn affect Southern Customs Union receipts directly impacting Botswana.

“Should the South African Rand continue to weaken more, it would have an impact on the SACU region,” she said.

She added that “It doesn’t help when you look at the volatility and the low demonstration of growth in the neighbouring country that is going to be the key driver of the SACU revenue. You cannot look at current events in South Africa and current events in South Africa and be at all positive that this going to be a super turbo charged source of revenue.”

But Khan further observed that there was high expectation on diamonds due to the rise in diamond prices globally saying that the diamond industry was expected to experience growth in sales.

“The revenue sources of Botswana are vulnerable due to the fact that it is dependent on the performance of commodities.  When commodity prices are high the diamond industry performs exceptionally well, and if the commodities prices weaken so is the diamond prices,” she said.

Khan advised Botswana to preserve the current credit rating status because the coming years would not be easy.

Former Bank of Botswana Governor and economist, Keith Jefferis said South Africa’s neighbours would be affected by the erratic and unstable political and economic situation in that country, which he said are causing slow growth in the region.

He stated that the downgrade might see investors turning away from the region, which could indirectly affect Botswana, as it is likely to cause them to turn away from Botswana itself. The rand lost three percent on the day South Africa was downgraded.

Reports indicate Botswana is underperforming relative to other middle income countries due to the fact that the economy was dependent much on the government rather than the private sector.

S&P said “The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk.”

The rating agency added that “This has increased the likelihood that economic growth and fiscal outcomes could suffer. We have put the country on negative outlook, reflecting our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than they currently project.”

 

April 2017
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