When South Africa sneezes, Zimbabwe and the region catch a severe cold

by Justice Zhou

It is still too early, if not ill-conceived, to predict an apocalypse for South Africa and the region simply because international ratings agencies have just downgraded its sovereign credit rating to junk status.

The eventual downgrading of Africa’s second biggest economy is viewed as long-overdue by some critics of the incumbent government, while others suggest the move by the ratings agencies was exaggerated.

Standard and Poor’s cited the latest cabinet reshuffle by President Jacob Zuma as the reason why it arrived at that decision. In other words, political risk was deemed to be the main contributing factor. 

Fitch Ratings has followed suit, arguing the cabinet reshuffle is likely to result in a change in the direction of economic policy, whereas Moody's has delayed its decision.

However, there is no denying that when South Africa sneezes, Zimbabwe and the entire southern African region are likely to catch a cold.

With Nigeria, Africa’s biggest economy, already battling to contain a crippling recession, the continent can’t afford a fall-out from adverse shocks by yet another one of the most influential economic giants.

In fact, much of the continent isn’t decoupled because South Africa’s investment footprint in Africa grew significantly over the years. Its role, to some extent, as investor and trading partner of last resort in the region and the rest of Africa, cannot be overemphasised.

So it is very important for Zimbabwe to follow the specifics of the dramatic events taking place in the neighbouring country very closely, as any major economic trends are bound to have knock-on effects on the regional economies.

South Africa’s downgrading is another way of warning investors or lenders that there is a possible risk that the country may default or be unable to repay the money it borrows especially from international lenders through various financial instruments.

But, honestly, the move doesn’t guarantee that the country will definitely fail to repay loans. It also doesn’t mean that South Africa, Zimbabwe and the entire region should now start to quack in their boots, preparing for the much-anticipated doomsday. The downgrading may soon turn out to be a mere blip.

The extent to which Zimbabwe has in many aspects integrated with its southern neighbour explains why it matters for South Africa’s economy to be stable.

If it were to face a major downturn as a result, Zimbabwe would be one of the hardest hit because South Africa is its largest trading partner, apart from being a top investor, in a country already beset with its own economic meltdown and persistent political instability.

On top of that, South Africa hosts millions of Zimbabwean nationals most of whom work there. They are a crucial source of disposable income for their kith and kin back home, while also playing a key role in providing the remittances needed to finance Zimbabwe’s yawning current account deficit.

Greater integration and trade partnerships of this magnitude can only heighten the chances of contagion or a domino effect.

While acknowledging, on the one hand, that South Africa is experiencing an elevated political risk, on the other hand, the country’s economy has proved to be resilient in the face of unfavourable headwinds.

For instance, a poll by Reuters suggests that South Africa’s rand will be relatively stable against the dollar until the year is out.

South Africa's net foreign exchange reserves are still pretty much in a favourable position when compared with other countries in the region, showing that it has some firepower to draw on in the event of a crisis.

Economies exposed to financial crises often employ foreign exchange reserves for the purpose of intervening in the market to influence the rate of exchange.

It, therefore, would be convenient to have cautious optimism and still hope that the country will prudently handle its political challenges in due course and hence weather the expected economic storm.