09 Apr 2017

The decision by two of the world’s big three credit rating agencies to downgrade South Africa’s economic outlook to ‘junk status’ over the past week is likely to only have minimal impact on Botswana, an economic consultant has observed.

South Africa, one of Botswana’s biggest trading partners and a major source of imported goods into the domestic economy, is reeling from the news of the decision by Standard and Poor’s (S&P) and Fitch to review their outlook.

On Friday, news filtered in that Fitch had downgraded South Africa’s economy from BB+ to BBB- with a stable outlook.

Ratings that fall beneath BBB are considered speculative or junk, meaning the country is less creditworthy to lenders and less attractive to investors.

Ms Sethunya Sejoe, an economist and consultant with Econsult Botswana, said in an interview that the downgrade itself was likely to have minimal impact in the local economy, although the political uncertainty that triggered the downgrade could yet be a challenge.

“Botswana will not be impacted directly and the impact will not be significant. The downgrade will be reflected on trade, given that South Africa is a major trading partner. One thing to note though is that the problem is not the downgrade but the underlying reasons for it, political and economic situations impacting on slow economic growth, which could spill into the region,” Ms Sejoe said.

A sovereign credit rating indicates the risk level of investing in a particular country and an assessment of a prospective debtor’s ability to pay back their debt.

With a lower credit rating South Africa could be faced with higher debt servicing costs, and become slightly less attractive as an investment destination.

Fitch cited the recent reshuffle to president Jacob Zuma’s cabinet, which included the ouster of popular Finance minister, Mr Pravin Gordhan and his deputy, Mr Mcebisi Jonas, as being likely to lead to a change in the economic policy direction of the regional power.

Earlier last week, S&P had also downgraded South Africa’s outlook to junk status, citing political instability in the aftermath of the cabinet reshuffle.

Botswana with an A- credit rating from S&P’s and A2 from Moody’s has the highest sovereign credit rating in Africa.

But Ms Sejoe did not believe that investors would necessarily clamour to invest domestically given South Africa’s downgrade.

"It is possible that investors may choose to invest in Botswana. However, there are other factors that determine investment decisions including among others public policy, cost of acquiring capital goods and the quality of human capital resource. On the negative side, investors may turn away from the region, which could indirectly affect Botswana,” Ms Sejoe said.

The change in the leadership of the South African treasury has also had an impact on the country’s currency, the rand, which traded weaker against major currencies over the past week.  

A drastic change in the exchange rate could pose a challenge for some domestic producers, Ms Sejoe said.

“The weakened rand has caused the pula to appreciate against the rand. This creates a problem for some of Botswana exporters, prices increase in Botswana while decreasing in SA. Hence, domestic production becomes expensive and imports cheap,” Ms Sejoe said. ENDS