Downgrade could hit the agriculture sector hard, Agbiz says
Imported inputs will cost more and financial institutions may make it harder for farmers to get credit
The move by Moody’s Investors Service to downgrade SA to junk status will likely cause a decrease in capital investment in the agricultural sector with farmers struggling to access credit, the Agricultural Business Chamber (Agbiz) says.
Agbiz is an association of agribusinesses operating in SA and Southern Africa.
The decrease is impossible to quantify at this stage, but will be significant enough to dent the prospects of the sector, which is largely regarded as a key driver of growth by the government.
It will likely last for as long as SA is in subinvestment grade and uncertainty around land reform remains. SA’s farming sector is heavily in debt. Total farm debt was at a record R168bn in 2018. About 60% of the debt is with commercial banks, 29% with the Land Bank and the rest is spread between agricultural co-operatives, private people and other institutions.
This will be a blow for the sector, a key foreign currency earner.
On Friday, Moody’s downgraded SA to junk status, citing the continuing deterioration in fiscal strength and structurally weak growth.
Furthermore, it raised concern that issues such as labour market rigidities and uncertainty over property rights generated by the planned land reform remain unaddressed.
President Cyril Ramaphosa’s July 2018 announcement that the ANC would seek to change the constitution to achieve land reform thrust the issue to the top of investors’ agenda and led to a drop in the value of the rand. The issue will be back on the agenda when parliament reconvenes, probably after the coronavirus has been contained.
The downgrade by Moody’s means all three major ratings agencies now hold SA’s sovereign debt rating at subinvestment grade, which will see the country drop off global bond indices, such as the FTSE World Government Bond Index, tracked by global institutional investors.
In a market update on Monday, Wandile Sihlobo, head economist at Agbiz, said the downgrade could lead to a deterioration in confidence levels in the agricultural and agribusiness sectors, and thereafter in investment.
“With economic conditions having deteriorated in the country further due to the spread of Covid-19 and measures put in place to contain the virus, the confidence levels could deteriorate in this particular subindex [capital investment] in the coming quarters,” he said.
Ultimately, this will lead to a drop in investment levels in agriculture.
Such a scenario would be a setback for the government and the private sector’s goal of ensuring that SA’s agriculture is among the sectors that drive economic growth and bring much-needed employment in rural areas, Sihlobo said.
The rand’s volatility and the ratings downgrade will also affect the cost of agricultural inputs. SA imports roughly 80% of its fertiliser, 99% of the active ingredients of agrochemicals, and much of its agricultural equipment. A weaker domestic currency will affect the cost of these inputs.
“So far, however, the lower oil prices [are] a buffer to what could have potentially been a steep increase in fuel and fertiliser prices,” Sihlobo said.
The ratings downgrade could also affect the availability of credit. Sihlobo said it was plausible that some financial institutions could become more risk-averse to lending, especially to already highly indebted farmers.