The downgrade from an agricultural perspective

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Both S&P and Fitch cited current political events, which resulted from the reshuffle, as the major reason for their respective decisions to downgrade South Africa’s credit rating. In their view, they believe current political events taking place in the country will weaken the standard of governance and public finances and ultimately lead to a change in the direction of economic policy which will undermine the progress that has been made in the last 12 months. During this period, there was a moment of economic stability in the country where the markets were responding positively to the fiscal order and discipline maintained by National Treasury, especially curbing spending by the state-owned enterprises (SOEs).

Billions lost

Being downgraded by two of the three major rating agencies (Moody’s being the third) means that South Africa is now generally considered as a ‘junk’ bond country by investors. Since the downgrade, financial stocks have lost billions and the local currency lost almost 10% of its value - moving closer to the R14/$ mark as investors sold-off South African bonds. In addition, South African banks will also be impacted negatively by the downgrade in that in line with the country’s downgrade, they have also been downgraded. In turn, this will make it more expensive for them to borrow money to lend out to individuals. This will effectively raise the interest rate structure in the country at large, which will consequently dampen economic activities. On the other side, government will have to spend more money, paying interest on its debt - meaning that it will have less available funds to spend on education, housing, infrastructure and social welfare - ultimately the poor are going to be the most adversely affected.

Currently, the economy is showing signs of recession as the country’s economic growth for 2017 has been revised to 0.2%. Unfortunately, this means the unemployment rate is likely to increase further as the country will not be able to create new opportunities for employment, equally so companies, especially small businesses which will be forced to cut down on their staff numbers and only keep those they see as highly productive. Typically, South Africa would have to grow its economy at least at a rate of 2% annually to be able to significantly reduce unemployment - as at this moment, this is a mammoth task and something that is highly impossible.

Impact on agricultural sector

Given this and the likelihood of interest rate hikes in the months to come, the question is what will the downgrade mean for the South African agricultural sector which has been and remains a significant contributor to the country’s employment creation? Farmers that are export oriented are likely to benefit more from the depreciation of the local currency, provided there is an increase demand for their products from foreign buyers. Provided that South African agricultural export producers remain competitive in the international markets, a weaker rand can gain them a significant market share as their products will be viewed as cheaper relative to the products priced in stronger currencies. The resulting increases in sales of agricultural products abroad can improve South Africa’s agricultural economy and job creation in the sector.

On the other side, given that the economy is showing signs of slow growth while the rand continues a downward trajectory, demand for imports is likely to reduce quite significantly. One could argue that this will also benefit local producers because demand for locally produced agricultural products will increase. While this might be true, it will be short lived if the rand depreciates further. The depreciation of the rand may lead to higher cost of imports such as fertiliser and other agricultural inputs. Due to this, inflation is likely to increase, which will have an impact on food prices. Interest rates, as mentioned earlier, are also likely to go up in the next few months - this will increase the cost of debt for agricultural investors, both at farm level and along the rest of the agricultural value chain.

In 1994, when Nelson Mandela became president, South Africa’s credit rating was classified as ‘junk’ BB. It was only in 1999 that South Africa managed to be upgraded to an investment grading that is above ‘junk’ BBB, and ultimately reaching BBB+ in 2005 under President Thabo Mbeki’s leadership. Given that it took five years to turn thing around then, one wonders how long will it take this time to turn things around.