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Drought ‘could push SA into recession’

Johannesburg - South Africa’s worst drought in decades could tip its already weak economy into recession as rising agricultural imports fed into rising inflation, ratings firm Moody’s said.

“The worst drought on record in South Africa is aggravating the ongoing economic slowdown, threatening near-zero growth if not a recession in 2016,” Moody’s senior vice-president and lead analyst for South Africa Kristin Lindow said yesterday.

Rising food prices due to the current drought are expected to feed into inflation and could cause recession. File picture: Itumeleng English, Independent Media. Credit: INDEPENDENT MEDIA

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Moody’s said while agriculture represented less than 4 percent of both gross domestic product (GDP) and employment, as well as less than 11 percent of exports, negative spillovers from the sector would increase food inflation and imports. It said this would motivate policy responses that would further depress already sluggish growth.

In an update to the markets, the ratings agency said it had lowered its growth forecasts to 0.5 percent this year and to just 1.5 percent next year, despite the expected activation of electricity supply from newly-constructed power plants.

Moody’s currently rates South Africa’s credit at two notches above sub-investment grade, but with a negative outlook. Fellow ratings firms Fitch and Standard and Poor’s have South Africa just one notch above junk.

The Reserve Bank also slashed its 2016 growth forecast to 0.9 percent from 1.4 percent earlier, while the International Monetary Fund forecast growth would peak at 0.7 percent.

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Last month the Reserve Bank raised its benchmark interest rate by 50 basis points after raising it by a total of 50 basis points last year, citing the worsening inflation outlook. Inflation figures due today are expected to show inflation rising above the Reserve Bank’s 6 percent target band.

“We expect this to lead to more rapid and sizeable monetary tightening that will further restrain growth,” she said.

“The increase in rates will serve as a further brake on an already weak economy, with an intensifying drought aggravating existing problems that have taken their toll on investor confidence over the past year,” Lindow said.

The agency said a key driver for the negative outlook was the expectation that economic growth would remain low for an extended period due to trade shock from the global commodity price collapse as well as energy shortages.

Within limits

It said the government was reallocating budget resources to stay within its spending limit.

“For the time being, the government has refrained from declaring a state of emergency, including in the President’s State of the Nation speech on February 11, that might trigger additional allocations.”

Moody’s said further clarity surrounding specific sources of drought relief would likely to be addressed in Finance Minister Pravin Gordhan’s Budget speech next Wednesday.

It said besides the drought, the steep decline of the rand in recent months caused by the firing of Nhlanhla Nene as finance minister had negative consequences for the economy.

Moody’s said the drought would stretch South Africa’s already wide trade and current account deficits above the target of less than 4 percent.

Moody’s said despite the slowing economy and the more competitive rand, the trade and current account deficits would remain wide in 2016 as a consequence of the drought.

“Crop shortfalls are driving up food prices, while maize imports are likely to prevent further narrowing of the trade and current account deficits,” the agency said.

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