Dried maize corn plants grow in a drought affected field operated by farmer Ryan Matthews in Lichtenburg, North West Province of South Africa, on Friday, March 20, 2015. The worst drought since 1992 in South Africa, the continent's biggest corn producer and traditional supplier of its neighbors, has damaged plants, with the nation predicting a 32 percent drop in the 2015 harvest to the smallest in eight years. Photographer: Waldo Swiegers/Bloomberg

Johannesburg - Moody’s rating agency has issued a report in which it warns that the worst drought on record in South Africa is aggravating the ongoing economic slowdown, threatening near-zero growth if not a recession in 2016.

As a result, Moody’s has revised down its growth forecast to just 0.5 percent, which is lower than the World Bank’s 0.7 percent figure. This it says is because of the drought and power shortages.

“Despite the expected activation of substantial electricity supply from newly constructed power plants next year, just 1.5 percent in 2017.”

The ratings agency notes while agriculture represents only a small – less than 4 percent – share of both gross domestic product and employment as well as accounting for under 11 percent of exports, negative spillovers from the sector will increase food inflation and imports and motivate policy responses that will further slow already sluggish growth.

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Drought conditions are taking a toll on agricultural output and exports, says Moody’s. “

Normally a net exporter of grains, South Africa will now need to import substantial amounts of grain to compensate for domestic production shortfalls. Moreover, although agriculture makes up a small share of the overall economy and labor force, the impact of the drought is having important spillover effects on the rest of the economy”.

In addition, says Moody’s, higher inflation and interest rates weigh on economic growth.

“Food prices rose rapidly in recent months due to the drought, which will push headline inflation above the upper limit of its 3 percent - 6 percent target range for a sustained period. We expect this to lead to more rapid and sizeable monetary tightening that will further restrain growth.”

Moody’s also warns that food imports will keep the current account deficit above 3 percent of GDP.

“The weakness in domestic demand is likely to constrain imports again this year, as will the renewed fall in oil prices, but the aforementioned grain imports and lower grain exports will partially offset those effects. Considering South Africa's structural current account deficit, the external financing required to cover the current account deficit exerts further pressure.”

It also notes there has been no fiscal impact from drought relief so far.

“Government is reallocating budget resources to stay within its spending ceiling. For the time being, the government has refrained from declaring a national emergency, including in the President's State of the Nation speech on February 11, that might have triggered additional allocations.

“Further clarity, it says, will only come in Finance Minister Pravin Gordhan’s budget speech next Wednesday.

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