Moody's Sees Risk of Zero South African Growth on Drought, Rand

  • Interest-rate increases may be bigger, faster, weigh on demand
  • Economy battered by commodities slump, power constraints

The worst drought on record is combining with a steep slump in the rand to bring the risk of minimal economic growth or even recession for South Africa this year, according to Moody’s Investor Service.

The continent’s largest corn producer received the lowest rainfall on record last year, reducing the harvest to the smallest since 2007, as the El Nino weather pattern withered crops. Inflation quickened to a one-year high of 5.2 percent in December as the cost of food rose. Climbing consumer prices will lead to bigger and faster increases in interest rates by the central bank, further damping demand, Kristin Lindow, Moody’s senior vice president and lead sovereign analyst for South Africa, said Tuesday in an e-mailed report.

Moody’s in December cut the outlook on South Africa’s credit rating, the second-lowest investment grade, to negative as the economy showed the effects of a collapse in global metal prices and disruptions to manufacturing from power blackouts earlier in the year. The rand has dropped 27 percent against the dollar since the start of 2015, the worst performance among 24 emerging market currencies tracked by Bloomberg, aside from the Brazilian real and the Colombian and Argentine pesos.

“A key driver for the negative outlook we assigned to South Africa’s Baa2 government rating in December 2015 was the expectation that economic growth will remain low for an extended period due to a terms-of-trade shock from the global commodity price collapse as well as energy shortages,” Lindow said. “The severe drought augments these risks.”

Rainfall in 2015 was the lowest since South African records began
Rainfall in 2015 was the lowest since South African records began

With South Africa now needing to import maize and groundnuts to supplement local production, the weaker rand exchange rate will drive up import costs. “The scale of the rand’s decline is squeezing producers hard,” Lindow said. “We expect to see a larger share of imported inflation coming through to the producer and retail price levels within a few months.”

The ratings company forecasts the country’s economy to grow by 0.5 percent this year and 1.5 percent in 2017 and expects the South African Reserve Bank to raise borrowing costs at its next two meetings in March and May.

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