The unsteadiness in neighboring South Africa continues to unfold in its various facets but Bank of Botswana Governor Moses Pelaelo said though posing a threat in terms of spillovers into Botswana the “risks are considered to be moderate overall.” He alluded to higher inflation and lower exports in SACU as probable effects that Botswana could be exposed to. Pelaelo said this in particular reference to South Africa’s credit rating downgrade on Tuesday last week at the Monetary Policy committee (MPC) meeting when addressing journalists. South Africa’s downgrade was done by international credit rating agency S&P earlier in the year.
Deputy Governor Kealeboga Masalila buttressed Pelaelo’s statement by saying that the danger is not close at hand. “There’s a possibility that it will happen but it’s not imminent,” he said. Regarding inflation Masalila said that while inflation in South Africa can increase if however the Pula value to Rand remains higher the risk of spillover will be minimal. Another lever which Botswana hinges itself on is the depreciation of the South African Rand against other currencies in the basket of currencies which the Botswana Pula is attached to. The Pula is attached to the Rand, constituting 45 percent and the SDR (consisting of US Dollar, Japanese Yen, Euro, British Pound and Chinese Renminbi) constituting the remaining largest share in the currency basket. The reasoning is that if “the Rand depreciates against the US Dollar, Botswana becomes more competitive against the rest of the world; there is a windfall gain on exports and foreign exchange reserves, and Botswana does not have to initiate a policy response,” according to a study by local economists titled Exchange Rate Policy and Price Determination in Botswana. Masalila said to that regard that the spill-over effects are therefore moderated. The study defined the risk Botswana is exposed to from the fact that it imports a significant amount of goods and services from South Africa which could subject it to its price increases especially with food.
Pelaelo continued to emphasise that the current political instability in South Africa should not be taken as an immediate threat but that only if prolonged could cause a delay in the country addressing its structural problems which is where the real threat is. Despite the modest risk he spoke of he did however point out that “South Africa is a big neighbor, it can have a big impact and we cannot be complacent about what is going on there.”
The March 2017 Business Expectations Survey (BES) which the Central Bank released recently provides a glance into South Africa’s economy and its relation to Botswana. “Regionally, the outlook for South Africa indicates growth of 0.8 percent for 2017 and 1.6 percent for 2018. The weak growth prospects for South Africa, which will potentially have an adverse impact on neighboring countries including Botswana, are partly influenced by political uncertainty and the slow pace of structural reforms. Moreover, the recent downgrade of South Africa’s credit rating to sub-investment grade could also undermine growth by constraining private investment and household consumption in that country. Potential negative spillovers into Botswana, though expected to be moderate, include risks of higher inflation, lower exports and SACU revenue,” reads the survey.