Opinion: South African credit downgrade 'will definitely hurt farmers' - FreshFruitPortal.com

Opinion: South African credit downgrade 'will definitely hurt farmers'

More News Opinion Top Stories
Opinion: South African credit downgrade 'will definitely hurt farmers'

By Hamlet Hlomendlini, senior economist at South African farmer organization Agri SA

Senior ANC leaders claim they were not consulted by President Zuma about his recent cabinet reshuffle which saw South African banks lose R60 billion (US$4.4 billion) in the hours following the decision, yet the same African National Congress (ANC)-led government expects investors to see certainty in the country.

Having said that, despite the new finance minister’s optimism about the solidity of the National Treasury and the commitment he made the day after his appointment to take responsibility to drive the country’s economic growth, the rating agency Standard & Poor’s (S&P’s) on Monday still took a decision to downgrade South Africa’s credit rating to BB+, otherwise known as junk status, citing political uncertainty as the major reason.

In justifying their decision, S&P’s certainly did not mince its words—it stated, “in our opinion, the executive changes (i.e. cabinet reshuffle) initiated by President Zuma have put at risk fiscal and growth outcomes.

"We assess that contingent liabilities to the state are rising. The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.

"We are therefore lowering our long-term foreign currency sovereign credit rating to a BB+ rating.”

Subsequent to that decision, Moody’s (the other rating agency) which placed South Africa on BAA2 –two notches above junk status last year has also announce its ratings review decision on Friday and is also expected to downgrade South Africa to a further negative territory for the similar reasons stated by S&P’s. The other rating agency, Fitch, has not publicly indicated a date for its rating review.

Although there’s been widespread talks that South Africa might be downgraded to a junk bond status in recent months, a week ago there was a good chance that the downgrading could have been avoided, mainly because the overall macro-economic environment was more favorable than it was around the same time last year.

The economy was showing signs of recovery, with inflation moderating within the targeted range of between 3-6%, business confidence was looking positive, and the local currency was performing relatively well—lingering under $13 mark.

Unfortunately, given the recent political developments, this positive trajectory has drastically turned the opposite way—it’s all uncertainty at this point, and it could take months to years to turn things around.

The junk bond status takes South Africa’s foreign currency rating to below investment grade. The risk associated with this is that due to the cabinet reshuffle, which puts policy continuity at risk, businesses may choose to withdraw their investments decisions that would otherwise have supported the much-needed economic growth.

Essentially what this means is that the future immediate outlook of South Africa is negative—suggesting that any investor that decides to invest in South Africa will be taking a short-term risk by doing so because they might not get the desired return on their investment.
In addition, the downgrading will lead to a higher cost of credit for all borrowers in South Africa.

This will have a tremendous impact on many households especially the poor and small businesses when it comes to accessing loans from banks and/or servicing their current debt. The local currency is likely to depreciate further, inflation might rise leading to higher food and fuel prices—again the poor will suffer the most. This will, potentially erode the employment gains the sector recorded so far.

From an agricultural point of view, the downgrade will definitely hurt farmers in that the immediate rise in inflation could have a negative impact on the sector’s competitiveness as production costs especially for the export oriented producers will now be relatively higher locally.

It is for the above-mentioned reasons that no country whose commitment is to attract foreign investment, grow the economy, build infrastructure, create employment, address inequality and deliver essential services to its people, wants to see its sovereign debt credit rating lowered into junk status.

www.freshfruitportal.com

Subscribe to our newsletter