Last month, neighbouring South Africa was declared a ‘junk state’ by two Ratings Companies, Fitch and Standard & Poor (S&P) with regards to the state’s economic prospects.
South African President Jacob Zuma’s recent cabinet reshuffle, which saw Malusi Gigaba replace Pravin Gordhan as the country’s Minister of Finance, as well as growing tensions within the ruling African National Congress (ANC) party, are believed to be the main reasons behind the ‘junk status’.
Political uncertainty has been seen as an essential factor behind South Africa’s weak economic growth as some believe the political energy that could be directed towards Foreign Direct Investment (FDI) opportunities is absorbed by efforts to maintain party unity and fend off leadership challenges.
Speaking to Voice Money on how the South African economic status is likely to affect Botswana, High Commissioner to Botswana, Zenene Sinombe explained that generally when a country gets relegated to a junk state, their currency weakens in value against the United States Dollar (USD).
Oil, which is bought in Dollars and is one of the earth’s most expensive commodities that drives the import/export sector, becomes even more costly.
Sinombe continued that when the currency weakens, a lot more money is required to buy fuel, rendering transporting goods expensive.
This has a knock on effect, as the good themselves become more expensive once they hit the shelves, as retailers have to charge more to make a profit.
“This situation, if not rectified hastily, will undoubtedly adversely affect us (Botswana) negatively,” he warned.
Last week, S&P released Botswana’s 2017 sovereign credit rating through the Bank of Botswana.
The country’s ratings of ‘A-’ for long-term bonds and ‘A-2’ for short-term bonds in domestic and foreign currency denominated borrowing are affirmed. The outlook remains negative.
“The country’s sovereign credit rating is threatened by a possible persistence of under-performance of the diamond sector that could result in a weaker economic growth and worsening of the fiscal position over the next 12 months,” reads a communiqué from Bank of Botswana.
It continues to state that nevertheless, the country’s sound fiscal position strengthens its resilience to external shocks.
The outlook could be revised upwards from ‘negative’ to ‘stable’ should more favourable developments emerge in the diamond sector, including a significant improvement in the fiscal position and an emergence of a broad-based private sector participation in the domestic economy.
The assessment also notes that prudent fiscal management, strong external balance sheet, robust institutional framework and a long- track record of political stability continue to reinforce the ratings.