SACU revenue under siege as SA goes into recession

10 Sep 2018

South Africa and other emerging markets like Turkey and Argentina are facing powerful crosswinds driven by rising oil prices, higher yields in the United States, dollar appreciation, trade tensions, and geopolitical conflict.

Moody’s has now revised its 2018 Gross Domestic Product (GDP) growth from 1.5 percent to between 0.7 percent and 1 percent and also taken down its 2019 forecast from 1.9 percent to 1.5 percent.

South Africa slipped into a technical recession on Tuesday, as figures for the second quarter of 2018 showed there was a decrease in Gross Domestic Product (GDP) for April, May and June.

Statistics South Africa this week revealed that, the economy shrunk by a further 0.7 percent – this marks two consecutive periods of contraction, which therefore equates to a recession.

Motswedi Securities Research analyst, Garry Juma told Sunday Standard that, “we should be very worried about SA getting into a recession given that it’s a major economic power house and major trading partner for Botswana.”

Southern African Customs Union revenue will likely come under pressure, the falling rand against the dollar will bring increase in the cost of goods in SA and imported inflation into Botswana given that we import a lot from SA. This does not paint a gloomy picture.

Should Botswana be celebrating on the other hand for the neighbour’s fall? There was a sell-off in the Rand when the GDP print was released, weakening from around R14.50 to around R15.30 (around 5.5 percent) versus the US Dollar. The Pula followed suit, strengthening from R1.36 to R1.40 (around 3.0 percent) against the Rand. The rand is 45.0 percent of the Pula basket and hence a drop in the Rand results in a drop in the Pula versus major currencies. The currency weakness will have   a positive impact on exports competitiveness.

Kwabena Antwi of Kgori Capital, indicated that this as a positive sign for Botswana exports since they are cheaper on a hard currency basis. However, “it is negative for our luxury tourism because it is priced in Dollars and therefore will be relatively more expensive than regional competitors that price in local currencies.”

Analyst Juma also concurs that industries can now buy machinery and raw materials in SA much cheaper given the weakness of the rand against the Botswana. However, he also submits that, “in the long term the cheaper imports from SA will widen our Current Account position with SA which isn’t good for us.” 

A stronger Pula versus the Rand will put downward pressure on local inflation due the foreign exchange pass through i.e. imports from SA get cheaper because they cost less.

Bank of Botswana’s recent Business Expectations Survey showed that some Botswana businesses borrow in the neighbouring SA.

Antwi said South African corporates will now look outside the country for growth opportunities with Botswana potentially benefitting in the form of increased investment. Additionally, he said any Rand corporate debt will be cheaper to service.

Given South Africa’s situation, Naledi Madala, Barclays Botswana Economist also narrate that, policymakers in South Africa face a tough choice between managing inflation and forex volatility on one hand, and supporting sluggish economic growth on the other.

This policy dilemma is a feature across a number of the major emerging markets in an environment of gradually tightening US Fed policy, a strengthening US dollar and rising market volatility. With inflation having risen sharply in recent months to 5.1 percent y-o-y as of July and rand weakness suggesting potential for further acceleration, Madala projects a little scope for monetary easing in South Africa. Secondly, “we believe that Moody’s is likely to reconsider its rating outlook on South Africa at its 12 October review. The upcoming 24 October Medium Term Budget will hold the key as to whether the country is placed on review for downgrade or not. For now, we only expect the outlook to be changed from stable to negative either before or shortly after the October Budget.”

The trade balance is expected to improve, returning to a surplus over the full year as mining output grows, supported by global demand and a weaker Pula. “De Beers’ H1 18 diamond production data reported growth of 9 percent y/y compared to 5.7 percent a year earlier, which bodes well for export prospects. However, the currency weakness will exert upward pressure on inflation locally,” she said.

SA is the first entry point for investors in the SADC region and thereafter these investors open branches /subsidiaries within the region (including Botswana).  By so doing, Madala worried that Botswana is likely to be affected negatively; as, an investor leaving South Africa may not relocate to Botswana or the region.

It is remains difficult to see exactly what the South African government can do, besides hew to the difficult path of confidence and growth-boosting structural reforms. In early August after an ANC lekgotla, President Ramaphosa revealed that the ANC had instructed the government to develop a stimulus package, but Ramaphosa said that it would be done within existing budgetary constraints. However, according to Madala “we think there is no budgetary room for a big fiscal stimulus package, with the credit rating agencies watching South Africa’s precarious fiscal debt dynamics carefully.”