Johannesburg - Low economic growth and the potential downgrading of South Africa’s debt rating are set to aggravate the already difficult situation in various sectors – and agriculture will be one of the hardest hit, according to economists.
South Africa’s credit rating from Standard & Poor’s (S&P) and Fitch is two notches above the threshold that distinguishes investment grade from speculative grade (which is often referred to as “junk grade” in investor circles).
If South Africa dropped to one notch above the threshold it would create nervousness about future downgrades and the rand would fall, Azar Jammine, the chief economist at Econometrix, said.
This was a cause for serious concern, especially when agriculture was involved because it would significantly increase the cost of raising capital for the industry.
Ernst Janovsky, the head of agribusiness at Absa, yesterday pointed to South Africa’s negative current account on the balance of payments.
Gross domestic product (GDP) “is down substantially and we need money to flow into South Africa and if we are downgraded it means we will fall into junk status on the list of global investors, which would halt the flow of capital”, he told Business Report.
This would result in the blow-out of the exchange rate, which would raise interest rates significantly and make it ridiculously expensive to get more money from overseas.
Another effect would be the very dramatic inflation on food prices, which would cause havoc along the agricultural value chain. Farmers might struggle to get competitive pricing on input costs, which would ultimately dent consumers’ pockets even more.
However, he maintained that agriculture remained a small part of total GDP and would not influence an improvement in the ratings.
“All we can have is stability, especially in the labour market,” he added.
Herman Marais, a managing partner at Agri-Vie, a food and agribusiness private equity fund, said the low economic growth environment was putting increasing pressure on local food value chains.
He said decreased consumer spending power was having a negative impact on the retail and food processing sectors, and on farmers.
“Consumers’ living standards are declining as their spending power decreases, and the prices of essential goods and services are escalating at a higher rate than consumer earnings, resulting in decreased affordability for luxury items and increased price comparison behaviour.”
In addition, retailers were feeling the impact of dwindling consumer spending power.
According to data from Agri-Vie, the average grocery trolley in a supermarket cost just over R400 in December last year, which was up by only 1.6 percent from a year earlier.
This indicated that consumers were cutting back, because the increase was more than 4 percentage points below the inflation rate.
“Food processors are being pressurised by price resistance at retail level, with labour and energy costs rising dramatically in the recent past,” Marais said.
Traditionally, the food manufacturing sector, like the rest of manufacturing in South Africa, was to a large extent built on the basis of competitively priced electricity and labour costs. But these costs had become less competitive in comparison with the country’s global peers, he said. - Business Report