South Africa's central bank says downgrades, weakening rand pose risk
Reuters (File photo) / Standard & Poor’s downgraded its ratings for seven South African banks to junk status following its decision to rate the country’s foreign debt as junk status.
South Africa’s credit rating could get downgraded deeper into junk status if political uncertainty triggered by the recent firing of the finance minister stalls reforms needed to grow the economy, an executive from S&P Global Ratings said on Wednesday.
“There are risks that potential growth outcomes could be weakened, especially with uncertainty that’s been brought along in a year where you may not get strong decisions for strong reform programs,” said Gardner Rusike, the associate director and lead analyst for South Africa at S&P .
Ratings agencies S&P and Fitch downgraded South African debt to sub-investment grade while Moody’s placed its sovereign credit rating on review, citing President Jacob Zuma’s decision to fire finance minister Pravin Gordhan as one reason.
Pain on your plate
The credit rating could have wide ranging effects – including fuelling higher food prices.
The price of July contract white maize has risen to R1984, from 1,700 on March 27 when Zuma recalled Gordhan from an investor roadshow before firing him.
South Africa’s drought-stricken farmers could come under extra pressure after the currency weakened in the fallout from a credit ratings downgrade to junk status that could also push up food prices, industry experts said.
Rand weakness will also squeeze farmers who have borrowed following the 2015 drought, the region’s worst on record.
“We have already seen a response to the weaker exchange rate with prices ticking up,” FNB senior agricultural economist, Paul Makube, said. “If the exchange rate blows out on us then definitely there will be a further increase in prices.”
The rand is forecast to further depreciate to 14 to the dollar by March next year according to Reuters data.
Grain prices usually increase by 0.5 percent for every percentage point drop against the dollar, the head of economic and agricultural intelligence, Sihlobo said.
“Whatever increase you see on the grain prices, half of that gets to be transferred to staple foods like maize meal and samp,” said Sihlobo. Samp is dried corn kernels, a staple in South Africa where more than 20 percent of the population lives below the food poverty line.
However this year’s bumper maize crop, up 84 percent from last year, could cushions price increases.
“Food inflation will continue to come down over the next few months but this could change by early next year,” said Sihlobo.
Input costs such as fertilisers and agro-chemicals, which are highly exposed to the exchange rate and make up 60 percent of grain production costs, will also rise after the downgrade, denting farmers’ profit margins further.
“The downgrading is like a slow death, you are not going to see it immediately but over time it kills you and makes you weaker and less competitive,” industry group Grain SA chief executive, Jannie de Villiers, said.Source: Reuters