The decision by Standard & Poor’s Global Ratings to downgrade South Africa’s foreign-currency debt has triggered concern that such move might have spill over effects to the country’s trading partners, Botswana included.
S&P Global Ratings cut South Africa’s foreign denominated debt from investment grade to junk status on Monday, just two days after President Jacob Zuma’s major cabinet reshuffle that resulted in the axing of the popular Finance Minister Pravin Gordhan. The credit ratings agency says its decision to downgrade South Africa’s 17 year old investment grade comes on the back of mounting concern that Africa’s most industrialised nation’s economic growths might be seriously hampered by its toxic political climate.
“The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. This has increased the likelihood that economic growth and fiscal outcomes could suffer,” S&P said in a statement on Monday before adding that they have put the country on negative outlook, reflecting their view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than they currently project.
The reaction to S&P’s downgrade was swift and mainly felt in the financial sector as the country’s banking index fell to the lowest in six months. The banking index plummeted by more than 8 percent following the cabinet reshuffle, resulting in most bank stocks shedding billions of rands in value. The main concern for banks is the return on assets and equity, in light of fears that non-performing loans might spike. The downgrade means the banks’ cost of funding might go up, resulting in the banks charging more for their loans, hitting consumers the hardest.
Besides the banking sector appearing like the first casualty, the country’s often volatility currency is expected to fluctuate in the coming days. The performance of the South African rand is closely watched by its trading partners, particularly in Southern Africa, where the country dominates trade. The rand is now the worst-performing emerging-market currency over the past week, with a loss of 9.7 percent against the dollar. Only two weeks ago, the rand was the best-performing emerging-market currency, gaining 10.1 percent against the dollar since the beginning of the year.
“Pula is pegged to the rand 45% and therefore any weakness in rand will affect pula movement against its major crosses especially the dollar. At FNBB, we estimate that the rand explains at least 80% movement of the pula against the dollar – therefore, a weaker rand against the dollar, means a weaker pula against the dollar. Our main export receipts and in dollars, and therefore weaker pula could reduce our exports receipts in value terms,” Mr. Moatlhodi Sebabole, Research manager at FNBB, said by email.
“SACU receipts are a function of trade of the member states outside SACU and SA contributes 90% of the customs received within the block. It is my belief that on the backdrop of recovery in global demand and improvement in mineral prices, as well as more stable production side for South Africa, the trade prospects for South Africa still look better than there were last year. A slightly weaker rand than current levels could actually increase the competitiveness of SA exports, with a trade-off to higher costs of imports of course and how that could impact local production and balance of payments.”
Mr. Sebabole further said in their view as FNBB, the global positives offset the local negatives, citing their models which show that the rand reacts 40% to local fundamentals and 60% to the global dynamics. As a result, they expect a relatively stable rand that will hover around an exchange of USD/ZAR at 13.00 for 2017 and 10.34 for BWP/USD. He said the SACU receipts forms least of their worries from the rand perspective, instead their focus is on upside risks that could arise from lower demand and slower recovery in commodity prices.
“Therefore at this moment, we do not anticipate any meaningful economic spillovers to Botswana. However, if the political risks heighten to instability and disruption of services, it will affect local business since we import over 60% from South Africa. Services like postal, logistics and fuel transportation could get disrupted should there be nation-wide SA services breakdown.” On the possibility of the banking stocks rout spreading over to Botswana Stock Exchange’s listed banks, home to one of the bank owned by a South African bank, the FNBB maestro says such possibility is unlikely.
“Given the weak-form efficiency of Botswana’s stocks, I do not anticipate the shocks that the banking sectors shares are taking in the JSE to be felt to that extent in the BSE-listed banking shares,” Mr. Sebabole said. “Of the 3 listed banks, only 1 is parented in South Africa and has not shown signs of weakness when its parent listing underwent significant price reduction in the past two weeks. The correlations between the JSE and BSE listed equities remain low and therefore casualty effect of declining stock prices in SA will not directly cause local stocks to underperform.”
Mr. Sebabole went on to sound caution that should South Africa receive further downgrades from other ratings agencies then it will lose its investment grade. The possibility of that is highly likely as Moody’s, another ratings agency, says it is assessing the economic impact of the changes to leadership in key government institutions and it is expected to announce its rating on Friday. Furthermore, ratings agency Fitch is likely to follow rival S&P and cut South Africa's sovereign credit rating to below investment-grade.
“If South Africa loses investment grade, then government and corporate borrowings will increase, and given that large corporates operating in Botswana originate from SA – an increase in cost of borrowing for parent SA companies might affect the corporates who fund from their SA counterparts. Additionally, foreign funding for banks might increase and cost of capital for placement of local funds in the SA institutions will rise in a risk-weighted adjusted basis,” Mr. Sebabole warned.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”