Depreciation of South African Rand threatens Namibia’s economy
By Josef Kefas Sheehama.
South Africa’s rand tumbled to 19.51 against the United States dollar, as geopolitical risks added to investor concerns over a domestic energy crisis and global monetary tightening.
South Africa is Namibia’s major import partner receiving between 66% and 80% of total imports. The effects of Rand depreciation will affect Namibia’s economy and the local market, and even if we don’t have the same problems as South Africa, we are still exposed to all the external factors.
Brief trade overview:
In February 2023, the top exports of South Africa to Namibia were Refined Petroleum (ZAR183M), Electricity (ZAR174M), Delivery Trucks (ZAR132M), Corn (ZAR102M), and Cars (ZAR63.5M).
In February 2023 the top imports of South Africa from Namibia were Gold (ZAR852M), Special Purpose Ships (ZAR295M), Beer (ZAR107M), Bovine (ZAR75.1M), and Non-fillet Frozen Fish (ZAR58.7M).
Hence, a weak rand against the USD has negative implications for Namibia’s import and export markets. Namibia enjoys warm and fraternal relations that are characterized by regular and increasing interaction at all levels. Furthermore, the Namibian economy is closely linked to South Africa with the Namibia dollar pegged one-to-one to the South African rand.
Therefore, should the variables influencing the pair continue at their current state, the Rand/NAD will find it difficult to regain any momentum. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared to advanced economies.
Additionally, the peg can overshoot as well as undershoot and either can be economically disruptive. Currency peg is dangerous for it can produce the wrong political and economic implications. It is too early to tell if economic sanction will be imposed against South Africa, should it be true as alleged by Western countries that South Africa aids material support to countries in conflict, but the effect of any sanction will also impact Namibia’s economy and the local market. Even if we don’t have the same problems as South Africa, we are still exposed to all the external factors.
With Namibia’s current narrow industrial and export base, it is going to be difficult to withstand external shocks. Our economy is reliant on only a few sectors such as fishing, diamonds, and uranium mining. As we look to our recovery, we must align our investments with our priorities to ensure that while we grow our economic resilience, we are also making progress on addressing climate change and reducing poverty and inequality. We can’t rely on South Africa for almost everything. We need to ask ourselves why we can’t produce our own. As a country, we can no longer afford to depend so heavily on another country.
Moreover, Namibia must reduce its commodity dependence, which may expose it to volatile markets. We need to understand that concentrated trade relationships may create levels of risk beyond the appetite of the country, for instance, if policies restrict flows between countries, and it may make sense to spin off or divest such flows while pursuing new domestic markets.
If we have a clear view of concentration, lawmakers can approve effective strategies and reimagine, rather than retreat from, global footprints. This is not only about managing risk. A transparent and up-to-date understanding of concentration, combined with the right measures to manage interdependencies, can be a source of competitive advantage. We must demonstrate thoughtful management of concentrated exposures and be more resilient in a changing world.
Rising geopolitical and geo-economic tensions are the biggest risks the world faces in 2023 while worsening international relations are hindering a collective will to tackle these concerns. The escalating geopolitical tension between superpower countries is threatening security. It is also increasingly likely that these attacks will escalate from mostly low-sophistication and temporarily disruptive to sophisticated and destructive, as part of a broader hybrid warfare strategy against the superpower countries. Hence, concentration prompts questions on our side whether to diversify or decouple.
Furthermore, additional steps are also needed to address several downside risks. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite as investors retreat to safeguard their investments. Given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target. The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt.
In this fragile economic environment, it is prudent to enhance resilience to help prevent adverse financial amplification if a large currency depreciation increases financial stability risks, de-anchor inflation expectations, and prevent price stability. Therefore, depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run. The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency.
To this end, a country whose currency is pegged will also be unable to establish the true value of its currency. This could be another challenge for investors and households alike already grappling with high inflation and the cost of servicing debt.
Now is the time to seize this opportunity and create an environment that empowers all people to thrive within our own Namibia to attain the level of currency independence it desires. We will try to sort out the opportunities of the situation and give also, if the case is, some concrete solutions and strategies that might improve the present situation in Namibia.
Therefore, we need to understand that a weaker currency could increase the cost of imports, as Namibia uses USD to buy oil and other commodities. The negative market sentiments cause capital flight.
Geopolitical shifts are likely to put incremental pressure on the Rand/NAD over time. However, cumulatively, they may start to change investors’ minds about the currency. If they do, the Rand/NAD has a long way to fall given relative depreciation. If momentum builds behind a weakening Rand/NAD, it will have significant repercussions across financial markets.