Wednesday 14 April 2021
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SA downgrade sparks inflation spike fears

Mally Likukela heiThe recent downgrading of South Africa’s foreign debt to junk status by Standard and Poor’s in the aftermath of the sacking of the country’s Finance Minister Pravin Gordhan last week will have negative implications for Namibia, economists have warned.
Speaking to The Patriot this week, economist Salomo Hei of the Makalani Fund Manager Namibia explained what it meant when a credit-rating agency categorises a country in the “junk status” grade.
Hei said the downgrading of South Africa to junk status meant that the cost of living in Namibia would increase because of the historical and economic ties that the two countries share.
“What this (junk status) then means is that if the rand depreciates against the US dollar, we are paying more for anything that we import.
“For a country like Namibia, which is closely linked to South Africa, it means that everything that becomes expensive in South Africa automatically becomes expensive in Namibia,” said Hei.
Moreover, as a direct consequence of South Africa’s junk status rating, the two countries will soon experience higher interest rates, according to Hei.
“The other effect of higher interest rates is that we are going to start paying for your (Namibians) houses just because of that downgrade. If interest rates go up, it means that lifestyle is going to become more expensive,” added Hei.
Furthermore, Hei highlighted that when interest rates go up, the cost of running a business too goes up, which might force some companies to lay off staff.
“High interest rates mean it becomes more expensive for businesses to operate, because the loans that they (businesses) get from the banks now become more expensive to repay. It means they would have to lay off some employees,” charged Hei.
On the contrary, however, the downgrade could boost Namibia’s exports particularly fish, said Hei, adding: “Our exports will become cheaper because the rand has lost value. We are looking at our minerals and fish that we are exporting; people will be buying more.”
Hei said investors, who are among the biggest contributors to the South African economy will lose confidence because of the country downgrade to junk status.
Sharing similar sentiments with Hei was another economic analyst, Mally Likukela, who said South Africa’s junk status downgrade meant that the “risk of not being able to pay back the money they (South Africa) have borrowed has increased”.
“The downgrade is the view of the rating agency on South Africa’s risk of default. Meaning that the possibility that they are unable to pay back the money they borrow is high.
“The junk status basically means that for them to borrow more money or to sell their debt (bonds), they are going to borrow at a higher cost – which means that credit to the South African government and businesses is going to be expensive,” said Likukela.
Likukela also echoed Hei’s sentiments that the effects of the downgrade on South Africa would spill over to Namibia.
“These implications include the higher cost of importing goods, as we import a lot from South Africa, thus we (Namibia) will be importing goods at a higher cost.”
Furthermore, Likukela noted that the downgrade would see inflation go up because the South African Reserve Bank will increase interest rates in order to contain it.
In addition, other rating agencies such as Moody’s and Fitch Rating are expected to follow suit and pronounce themselves regarding South Africa’s economic rating, said Likukela.
“This (downgrade) will chase away investors because they will not feel safe to invest in South Africa at that grade (junk status).
“Because of the closeness of the South African and Namibian economies, investors view Namibia with the same lens. So, in the long run, it will affect Namibia’s attractiveness as an investment destination,” stated Likukela.
However, Likukela was quick to point out that South Africa’s downgrade will not necessarily translate into a similar downgrade for Namibia despite their economic relationship.

Looming recession
Furthermore, Likukela said due to the absence of Foreign Direct Investment (FDI) that may arise from the downgrade, both Namibia and South Africa face the risk of sliding into recession.
“If you don’t have Foreign Direct Investment coming in, you will not experience growth.
So, for the two countries (Namibia and South Africa), this (downgrade) has a potential to drag the economies into recession,” warned Likukela.
As a consequence, the cost of getting capital funding is high and the possibility of freezing or shelving more capital projects will become imminent, according to Likukela.
“The capital projects will have to be either put on hold or abandoned and these projects are the drivers of the economy and without them, the economy will not grow as you want it.
“The jobs that were supposed to be created through these capital projects are not going to be created, so unemployment will increase and our buying power will be taken away,” lamented Likukela.

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