South Africa’s rand tumbled to 19.51 against the United States dollar, as geopolitical risks added to investor concerns over a domestic energy crisis and global monetary tightening.
South Africa is Namibia’s major import partner with about 66% to 80% of total imports. The effects of Rand depreciation will affect Namibia’s economy and local market. Even if we don’t have the same problems as South Africa, we are still exposed to all the external factors. A brief trade overview, in February 2023, showed the top exports of South Africa to Namibia were Refined Petroleum (ZAR183M), Electricity (ZAR174M), Delivery Trucks (ZAR132M), Corn (ZAR102M), and Cars (ZAR63.5M). In February 2023, the top imports of South Africa from Namibia were Gold (ZAR852M), Special Purpose Ships (ZAR295M), Beer (ZAR107M), Bovine (ZAR75.1M), and non-fillet frozen fish (ZAR58.7M). Hence, a weak rand against USD has negative implications for Namibia’s import and export markets. Namibia enjoys warm and fraternal relations that are characterised by regular and increasing interaction at all levels. Furthermore, the Namibian economy is closely linked to South Africa, with the Namibia dollar pegged one-to-one to the South African rand.
Therefore, should the variables influencing the pair continue at their current state, the Rand/NAD will find it difficult to regain any momentum. Hence, such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports, compared with advanced economies.
Additionally, the peg can overshoot as well as undershoot, and either can be economically disruptive. A currency peg is dangerous, for it can produce the wrong political and economic implications. It is early to tell if economic sanctions will be imposed against South Africa, should it be true as alleged by Western countries that South Africa aids material support to countries in conflict. The effect of any sanction will affect Namibia’s economy and local market. Even if we don’t have the same problems as South Africa, we are still exposed to all the external factors. With Namibia’s current narrow industrial and export base, it is going to be difficult to withstand external shocks. Our economy is reliant on a portion of sectors such as fishing, diamonds and uranium mining. As we look to our recovery, we must align our investments with our priorities to ensure that while we grow our economic resilience, we are also making progress on addressing climate change and reducing poverty and inequality. We can’t rely on South Africa for almost everything. We need to ask ourselves why we can’t produce our own. As a country, we cannot afford to depend on other countries.
Moreover, Namibia must reduce its commodity dependence, which may expose it to volatile markets. We need to understand that concentrated trade relationships may create levels of risk beyond the appetite of the country, for instance, if policies restrict flows between countries, and it may make sense to spin off or divest such flows while pursuing new domestic markets.
If we have a clear-eyed view of concentration, lawmakers can calibrate effective strategies and reimagine, rather than retreat from, global footprints. This is not only about managing risk. A transparent and up-to-date understanding of concentration, combined with the right measures to manage interdependencies, can be a source of competitive advantage. We must demonstrate thoughtful management of concentrated exposures, and be more resilient in a changing world. Rising geopolitical and geo-economics’ tensions are the most urgent risks the world faces in 2023, while worsening international relations are hindering a collective will to tackle these concerns.
The escalating geopolitical tensions between superpower countries is threatening security. It is also increasingly likely that these attacks will escalate from mostly low sophistication and temporarily disruptive to sophisticated and destructive, as part of a broader hybrid warfare strategy against the superpower countries. Hence, concentration prompts questions about whether to
diversify or decouple.
Furthermore, additional steps are also needed to address several downside risks. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite, as investors retreat to save their investments. Henceforth, given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target. The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the build-up of external debt. The fiscal policy should be used to support the most vulnerable, without jeopardising inflation goals. In this fragile economic environment, it is prudent to enhance resilience. The severe disruptions in low currency markets would trigger large changes in these premia, potentially causing macroeconomic and financial instability. In this case, temporary foreign exchange interventions may be appropriate. This can also help prevent adverse financial amplification if a large depreciation increases financial stability risks. The temporary intervention can likewise support monetary policy in rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability. Therefore, depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run. The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency.
To this end, a country whose currency is pegged will be unable to establish the true value of its currency. This could be another challenge for investors and households alike already grappling with high inflation and the cost of servicing debt.
Now is the time to seize this opportunity and create an environment that empowers all people to thrive within our own Namibia. Namibia will be able to attain the level of currency independence it desires. We will try to sort out the opportunities of the situation and give also, if the case is, some concrete solutions and strategies that might improve the present situation in Namibia.
Therefore, we need to understand that a weaker currency could increase the cost of imports, as Namibia uses USD to buy oil and other commodities. The negative market sentiments cause capital flight.
Geopolitical shifts are likely to put incremental pressure on the Rand/NAD over time. However, cumulatively, they may start to change investors’ minds about the currency. If they do, the Rand/NAD has a long way to fall, given relative depreciation. If momentum builds behind a weakening Rand/NAD, it will have significant repercussions across financial markets.
*Josef Kefas Sheehama is an independent economic and business researcher.