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Downgrading: Confidence levels in agriculture can drop

───   CHRISTAL-LIZE MULLER 08:54 Tue, 31 Mar 2020

Downgrading: Confidence levels in agriculture can drop | News Article

As per usual on a Tuesday, Wandile Sihlobo, chief economist at the Agricultural Business Chamber of South Africa, Agbiz, provides a weekly insert on South African agricultural markets.



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This comes after Moody's downgraded South Africa’s sovereign credit rating to sub-investment grade and placed a negative outlook on the rating. He says the key drivers for this downgrade include weak economic growth, continuing deterioration in fiscal strength, and slow progress on structural economic reforms. It is now the first time in post-apartheid South Africa where all major rating agencies, Moody’s, Fitch and S&P, have South Africa’s credit ratings in sub-investment grade territory. 

According to Sihlobo, there could be various transmission channels, of which mainly three major ones can have an impact on the country's agriculture.   

He believes there could be a deterioration in confidence levels in the agricultural and agribusiness sectors, followed by lower confidence levels in investment. Confidence in the agricultural and agribusiness is measured through the Agbiz/IDC Agribusiness Confidence Index (ACI). The index in the first quarter of this year improved by six points to the neutral 50-point mark. This slight improvement was underpinned by improved agricultural conditions across the country following good rain. The ACI comprises of 10 subindices, of which two are economic conditions in the country and capital investment. 

With economic conditions having deteriorated in the country further, due to the spread of the Covid-19 pandemic and measures put in place to contain the virus, the confidence levels could deteriorate in this particular subindex in the coming quarters. The sentiment regarding the capital investment subindex could also show deterioration in the coming quarters amid the recent downgrade by Moody’s. 

He says this will be a drag on the ACI, and possibly investment levels in agriculture. 

In addition the volatility of the domestic currency could be another transmission of the effects of a sub-investment grade into agriculture. This would particularly be felt through the cost of inputs. South Africa imports roughly 80% of its fertiliser, 99% of active ingredients of agrochemicals, agricultural equipment and fuel. The cost of these inputs could be affected by the weaker domestic currency. 

Sihlobo says there could also be a credit impact as a credit rating downgrade to a sub-investment level would be felt through the rise in a cost of capital as the South African Reserve Bank (SARB) would likely lift the interest rates in response to the possible exchange rate depreciation and associated inflation risks. The transmission of a sub-investment grade could now be through the scarcity of capital. It is plausible to think that some financial institutions could become more risk-averse to lending, especially to already highly indebted farmers.


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