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S.A recession to hit Namibia hard - analysts

Fri, 9 June 2017 18:35
by Kelvin Chiringa

South African based Benchmarking and Manufacturing analyst Dr. Justin Barnes and an array of leading local analysts have warned that the South African recession will impact negatively on Namibian imports as demand levels sink down, among a host of negatives.

Africa’s most industrialized economy plunged into a second recession since 2009 with Gross Domestic Product (GDP) contracting by 0.7% while the median of 19 economists’ estimates was for 1 % expansion; this is according to a Statistics South Africa report. “As Namibia’s largest trade partner, recession in South Africa is likely to have a negative impact on the country.

However, given that South Africa primarily exports to Namibia, as opposed to importing, the impact should not be too negative in the short term,” says the analyst. He however projected that “it is likely that Namibian exports to South Africa may be reduced given lower levels of demand, but as exports are small, the overall impact on Namibia should not be too signi?cant.” “Imports from South Africa into Namibia will also be unaffected as this is dependent on Namibian demand conditions.

At a broader investment sentiment level, the picture is however more concerning for Namibia,” says Barns. The B&M Analyst af?rms that the negative news pertaining to the health of the South African economy may negatively in?uence views on Namibia’s medium to long term position, particularly given its membership of SACU and its close economic ties to South Africa.

“The medium term prognosis for South Africa is concerning, with the economy likely to grow only marginally, if at all, over the next couple of years. This cannot be positive for the future growth of Namibian economy,” he says. While central bank projects GDP growth to increase to 2.9 percent and 3.8 percent in 2017 and 2018, respectively, Dr. Kakuhaja Matundu Omu holds says, “The struggling South African economy will compromise Namibia’s positive economic prospects for 2017 and deepen Namibia’s economic woes.” With a double sovereign credit downgrade and a third expected very soon, Omu says one would see the South African economy being in for a long haul.

“Thus one would expect a very slow and painful recovery for the South African economy, which won’t augur well for the Namibian economy. So, Namibia should brace itself for tough times ahead. Both consumers and the Namibian government should expect more “belt-tightening”,” he says.

Pushed on whether there are any opportunities for Namibia coming out of the challenges posed by a weakening RSA economy, Omu says, “Yes, maybe it is time for Namibia to wake up and push earnestly the “Growth-at-Home” strategy. Seriously identify the low hanging fruits and pluck them!” “Firstly, we can expect less trade in between South Africa and Namibia, as consumers in both countries continue to feel ?nancial pressure.As a result, we could expect a dip in SACU tariffs which would mean lower government revenue for Namibia next year,” posits IJG Securities analyst Dylan van Wyk.

He cautions that a possible local currency credit rating downgrade from one or more ratings agencies is imminent if growth does not pick up leading to an out?ow of funds from the country and a weaker currency.

“Furthermore, the chances of interest rate increases have diminished signi?cantly. In fact, we might see the South African Reserve Bank start considering interest rate cuts to stimulate economic growth. This might lead to cuts in Namibia as well,” says Wyk.

Simonis Strom Securities Analyst Frans Uusiku also relayed fears of the local economy catching a cold from the South African sneeze. “We view the economic situation in South Africa as resembling a mirror-image of Namibia’s economic environment. Note that, the recession in South Africa was largely triggered by a 2.3% decrease in household consumption expenditure thus contributing -1,4% points to total growth, and by a decrease in Government consumption expenditure thus contributing -0,2 of a percentage point. In essence, this highlights the impact of ?scal 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 says.

Simonis Storm af?rms that these economic fundamentals would play out in Namibia for the following reasons;

1. Private Sector Credit Extension (PSCE) growth has slowed substantially to 8.1% at the end of April 2017 compared to 12.6% in the same period of 2016. We believe that businesses reliant on Government are now more exposed to short term ?nancing as working capital becomes tighter

2. The private sector has been in a recession since 2012 if you exclude Construction, 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 the Great Recession. Note that in 2016, Government represented 45.5% of GDP - excluding SOEs. We expect this to reduce to 37.6% of GDP in 2017 as Government consolidates. Also, Government has revised construction spending downwards by 41.0% at the midterm budget from N$6 519mn for the FY2016/17 and no allocations to new capital project was done for FY2017/18. We thus believe that the construction sector will remain in a recession as government ?scal squeeze lingers.

3. Vehicle sales in April 2017 contracted by 35.0% y-o-y to 946 units compared to 8.0% contraction recorded in the prior month . We expect this trend to continue as ?scal consolidation ligers, while consumers are also under pressure.

4. Unemployment in Namibia has also increased to 34.0%, suggesting deterioration in purchasing power and a decline in aggregate demand “Overall, we maintain our annual economic growth forecast of 2.8% - subject to our revision of 1Q2017 GDP expected this month,” says Uusiku.