Weakening Rand to further put pressure on local economy -PSG
The Namibia Dollar’s close link to the South African Rand will continue to keep the local economy on the edge following the move by the Bank of Namibia to maintain the interest rate at 6.75%, this week.
Both central banks are cautious, despite very weak economic growth and lower inflation in both countries, which is due to significant downside risks to the currency outlook, the threat of large capital outflows and escalating government debt costs.
According to analysts from PSG Konsult Namibia, the Rand, to which the Namibia Dollar is pegged at par, has subsequently weakened past the psychological R14/$-level due to rising concerns over further downgrades, which will put pressure on Namibia’s inflation rate.
“Given that the rand is expected to suffer short-term weakness due to South Africa’s political and credit rating woes and that the US Fed has signalled that it will push ahead with another US interest rate hike this year, we believe the chance of another Namibian interest rate cut this year has evaporated,” PSG Konsult said.
The PSG analysts stated that the chance of further South African credit rating downgrades rose significantly following the tabling of South Africa’s Medium Term Budget Policy Statement (MTBPS) on 25 October, which indicated plans to increase borrowings to help fund an expected wider budget deficit.
Furthermore PSG said, the South African Customs Union (SACU) Common Revenue Pool is expected to shrink as weaker-than-expected.
“Hence, the Namibian government can expect less SACU revenues over the medium term, which will put its own soon-to-be-announced Mid-term Budget Review under considerable pressure,” PSG Konsult added.