WINDHOEK – Local economic analysts have cautioned that South Africa’s technical recession could have serious implications for Namibia’s sovereign credit ratings recovery efforts, will in all likelihood exert increased pressure on already declining disposable incomes and is expected to result in decreased Southern African Customs Union (SACU) revenue which will mean more domestic fiscal constraints. South Africa’s economy slide into a technical recession as it shrunk 0.7 percent in the second quarter. The downturn, which was South Africa’s second consecutive quarter of negative growth, was driven by contractions in agriculture, transport, trade and manufacturing industries.
While SA has once again slipped into a technical recession, following the 2016 fourth quarter and 2017 first quarter contractions, the Namibian economy remains in recession having contracted for three consecutive quarters from the third quarter of 2017 to the first quarter of 2018. Since the second quarter of 2016, the domestic economy has contracted by a quarterly average -0.6 percent.
“The SA numbers imply prolonged pain for the Namibian economy. This is because a weaker Namibian Dollar will continue to fuel inflation, thereby increasing the cost of living for households which are already under pressure from declining disposable incomes. The strength of the South African economy is a key component of the SACU revenue sharing formula, implying declining SACU receipts and tighter fiscal space. The recession reduces any likelihood of a Namibian sovereign ratings recovery to investment grade territory in the near to medium-term due to the extent to which the two economies are intertwined,” commented Ngoni Bopoto, Research Analyst at Namibia Equity Brokers.
Indileni Nanghonga, an economic analyst at stock brokerage, Simonis Storm Securities, agreed with Bopoto, saying the SA contraction will pose a threat to the SACU revenue which is 39 percent of Namibia’s revenue.
“With already slacking consumer confidence, we believe that lower SACU revenue coupled with low tax revenue will worsen the Namibian economic situation. The contraction has also awoken possibilities of further credit rating downgrades that could lead to an additional sell-off in SA local currency bonds, which simultaneously affects the Namibian bond yields,” said Nanghonga.
She added that as risk escalates, the depreciating Rand and Namibian Dollar will put upward pressure on inflation. “We are at a high risk of cost push inflation amidst already heightened fuel price increases. We expect inflation to continue ticking up as fuel prices increases and the Rand depreciation persists. Excessive increases could lead to sooner than expected increase in interest rates,” Nanghonga cautioned.
Also weighing in, Research Associate at the Economic Association of Namibia, Klaus Schade, believes that domestic growth will remain subdued over the short to medium-term as structural challenges persist.
“South Africa faces a technical recession owing to two consecutive quarters of economic contraction. It remains to be seen whether this will turn into a ‘real’ recession at the end of the year, meaning overall negative growth during 2018.
The contraction in the second quarter was caused by a drop in agricultural output by 29 percent as well as in the transport sector by 4.9 percent. In contrast, the mining and construction sectors expanded by 4.8 percent and 2.3 percent respectively. I expect the agricultural sector to be less import depended than for instance the mining sector and hence the impact on imports and consequently on SACU revenue will be rather limited,” said Schade.
He warned however that Namibians will most likely face higher prices for agricultural products imported from South Africa, owing to the significant decline in output. Schade noted that price increases for vegetable and for fruits in Namibia have already accelerated during the second quarter but stated that if the livestock sector in South Africa has also contracted it could result in higher prices offered at abattoirs there, which could benefit Namibian livestock farmers.
“Overall, the technical recession will not boost investor confidence and could put further pressure on the South African Rand and the Namibian Dollar that has already depreciated by over 20 percent this year. “This will result in further price increases for imported goods and services, in particular fuel,” Schade warned.
The recession is the first in South Africa since the 2008-2009 global financial crisis, when South Africa experienced three consecutive quarters of economic decline. Before the release of this week’s data, Bloomberg said only one of 12 economists surveyed had predicted a contraction.