SA crunch a double-edged sword

South Africa's recession mimics local conditions in which consumers are coming under increased pressure while the situation is also likely to affect Southern African Customs Union (SACU) tariffs significantly, analysts said yesterday.

IJG head of research Eric van Zyl says that the recession will impact Namibia in a number of ways.

“The probability that the South African Reserve Bank (SARB) will cut interest rates to stimulate economic growth has increased,” Van Zyl said.

South Africa entered into a technical recession this week when the South African Statistics Agency (StatsSA) reported that economic growth for the first quarter had contracted by 0.7%.

This is South Africa's second 'technical' recession in eight years.

Said Van Zyl: “Whether or not the Bank of Namibia (BoN) will follow the SARB with interest rate cuts is uncertain, but the probability is high as the Namibian economy is in need of stimulation as well.





“Namibia is likely to benefit from lower inflation over the short term as the majority of our imports are through South Africa.”

Sharing his thoughts on the likely events that would follow domestically following slowed growth, economist Klaus Schade said: “Subdued economic growth in South Africa can reduce the demand for Namibia's exports to South Africa, in particular beer and meat, since South African consumers are left with less disposable income. The contraction of the South African economy will impact negatively on imported goods and services into South Africa and hence customs revenue, which finally translates in lower SACU transfers to the member states.”

Simonis Storm analyst Frans Uusiku told Namibian Sun that the technical recession in South Africa was very similar to economic conditions locally.

He said, just like here, consumers are also coming under increasing pressure in South Africa.

“We view the economic situation in South Africa as resembling a mirror-image of Namibia's economic environment,” he said.

According to him, the [technical] recession in South Africa was largely triggered by a 2.3% decrease in household consumption expenditure thus contributing -1.4 percentage points to total growth, and by a decrease in government consumption expenditure, thus contributing -0.2 of a percentage point.

“This highlights the impact of fiscal consolidation and a tight consumer environment as evidenced by an increase in unemployment of 27.7% and a declining trend in both vehicle sales and private sector credit extension in South Africa,” he said.

As far as he's concerned, the private sector has been in a recession since 2012 save for the construction sector which was mainly spurred on by government spending.

“The private sector has been in a recession since 2012 if you exclude [the] construction [sector], meaning government spending and construction have been the main drivers of economic growth since 2009. In fact, the private sector only grew in 2010 and 2012 after 2008.”

According to him, further proof of government's consolidation is its contribution to GDP.

“Note that in 2016, government represented 45.5% of GDP, excluding public enterprises. We expect this to reduce to 37.6% of GDP in 2017 as government consolidates,” Uusiku said.

Van Zyl reiterates both Schade and Uusiku's sentiments saying: “Worth noting though is that consumption in South Africa is contracting. This is likely to affect the SACU revenue pool negatively. Should we see further contractions in Namibian and South African consumption spending, we may see SACU revenues for the next budget year revised lower.”

In its vehicle sales report for April, Simonis Storm also found that sales contracted by 35% year-on-year to 946 units compared to 8% contraction recorded in the prior month, indicating just how much consumer spending was constrained.

“We expect this trend to continue as fiscal consolidation lingers, while consumers are also under pressure,” Uusiku added.

Van Zyl also raised the probability of a rating's downgrade in the aftermath of the recession.

“Another point of concern is the longer term implications of further contractions in South Africa. Should we see further contractions in the South African economy we are more likely to see further credit ratings downgrades. A contracting economy which continues to issue debt to service a budget deficit does not bode well for investor confidence and credit ratings. This in turn is likely to lead to rand weakness over the medium to long term,” Van Zyl said.

Namibia entered a technical recession in December 2016 when economic growth contracted by 1% in the third quarter of 2016.

But the country has since sailed through troubled waters according to Schade.

“The recession was only for the two quarters in 2016 when negative growth was recorded,” he told this newspaper.

The real GDP for the third quarter of 2016 recorded a contraction of 1% compared to a 5% growth registered in the corresponding quarter of 2015.



-Additional reporting by Fin24



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