Wednesday, October 20, 2021

When SA’s economy slides, Botswana must remain on guard

As if it doesn’t already have its own economic rut caused by the persistent torpid global economic conditions to escape from, Botswana might potentially find itself also having to fend off the spill-over of South Africa’s “untimely” credit rating downgrade by the international credit rating agency S&P.  

Interestingly the recent Cabinet reshuffle in South Africa is something that also happened in Botswana, a few months apart. However what is making the neighbouring country’s changes contentious is that the appointments have to do with the Finance sector which carries weight in determining the direction and growth of the economy. 

When President Ian Khama announced  the changes  business carried on as usual, but when South Africa’s President Jacob Zuma did the same it instantly placed the country in a potentially dangerous state at the heat of the credit ratings downgrade that could trigger the free-fall of the Rand. 

It is worth noting, however, that the downgrade caused a less dramatic drop in the Rand than was seen in the previous ouster of ex-Finance Minister Nhlanhla Nene. 

South African Economist Dr Azar Jammine was quoted saying: “If the Rand goes into free-fall and reaches R16 or R17 to the DollarÔÇÜ inflation will riseÔÇÜ so will food prices and the petrol price will rise. Households will suffer.” 

Jammine’s forecast of the ramifications of the downgrade although referring to South Africa also provides reason for Botswana to stand on guard.     

South Africa as one of Botswana’s major trading partners has a hand to play in the local economy particularly to do with its currency movements which as a result makes the Pula vulnerable to that of the Rand. 

The political hand picking by  Zuma characterised by short-lived incumbency of finance ministers has in the recent past subjected the Rand to volatility, which unfortunately put Botswana on edge moving it towards protecting its local economic and investment climate from the instability. 

The reason for Botswana’s concern in light of South Africa’s turn of events points to the historical peg of the Pula to the Rand. Prior to the tinkering of the real exchange rate policy as was done by the Ministry of Finance and Economic Development at the beginning of the year the weight of the Rand in the currency basket to which the Pula is pegged, constituted the largest share at 50 percent. 

After the revision, it now constitutes 45 percent which now gives the SDR the largest share consisting of US Dollar, Japanese Yen, Euro, British Pound and Chinese Renminbi. The influence of the Rand though at a much less level than before does not remove the threat of its plunge. 

Analysts explain that many of Botswana’s domestic firms, whose consumption, expenditure and revenue decisions have a significant Rand denominated component because of the importation of goods and services from South Africa.      

A study by local economists titled “Exchange Rate Policy and Price Determination in Botswana”,  puts the potential rise in inflation in South Africa in context to Botswana by explaining that “although not all inflation is imported, in practice domestic prices tend to move fairly closely in line with import prices”. 

In other words, because Botswana imports a significant amount of goods and services from South Africa it extends that it could be subjected to its price increases especially with food. 

The Rand depreciation, also on the other hand, provides a benefit, which the study elucidates as “when 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 oreign exchange reserves, and Botswana does not have to initiate a policy response.” 

This benefit doesn’t come easily because as explained by Bank of Botswana in its February monetary policy committee report that downside risks exist in any unanticipated large increase in administered prices and government levies as well as international oil and food prices beyond current forecasts.     

A poll conducted by Reuters posits that the Rand will remain stable into the rest of 2017 estimating that it will weaken to R14 against the Dollar as the markets had in anticipation of recent events factored them in. 

It would be much more sensible for Botswana not to let its guard down as such a forecast does not guarantee stability. Bank of Botswana currently maintains a positive outlook in the medium term hence a lower bank rate at 5.5 percent but it warns that this outlook is subject to downside risks such as any unanticipated large increase in administered prices as well as international oil and food prices, some of whom the unpredictable South African currency movements can trigger.

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