Poor will be hit hardest by downgrades

The debate over the recent downgrade of SA’s credit score has been dominated by the middle class and the wealthy rather than the indigent, who are most likely to be negatively affected, due to information asymmetry.

This is unfortunate since the indigent will be one of the hardest-hit population groups, specifically through higher food prices and soaring lending rates.

Statistics SA data show that more than 15-million South Africans rely heavily on staple foods such as grains for their daily meals. One of the more direct effects of the downgrade is reflected in the depreciation of the rand. While the implications are manifold, a weaker rand has a significant effect on the food value chain – from the farmer to the consumer.

From the farmer’s perspective, the backlash could be twofold. On the one hand, SA’s agricultural sector imports a significant amount of inputs — 80% of annual fertiliser consumption, 98% of annual agrochemical consumption, as well as fuel, machinery and capital equipment. All of these directly affect farmers’ input costs, and therefore, global competitiveness.

For example, fertiliser costs constitute about 35% and fuel 11% of grain production costs. Unfortunately, these products do not have many substitutes, nor can they be produced domestically as we are not endowed with the necessary mineral compositions.

Moreover, the expected higher interest rates could negatively affect the agricultural sector. In 2015, South African farm debt totalled R142bn in real terms, a record level in a database dating from 1980. Given that 2015-16 was characterised by drought, farm debt is expected to spike.

Over the longer term, higher production costs could negatively affect SA’s farming businesses, thus compromising national food security. On the other hand, the rand exchange rate positively influences the net realisation of agricultural exports. However, production and, in turn, export volumes could be lower due to higher production costs.

From a consumer perspective, a simple illustration of this would be to look at the correlation between imported grain prices and the exchange rate. When the rand is weak, the prices of imported grains typically rise, which adds further strain to an already struggling indigent population.

SA is traditionally a net exporter of maize. Between 2012 and mid-2015, there was no correlation between domestic maize prices and the exchange rate, but in 2015-16 the correlation strengthened significantly as a result of the shift from being a net exporter to a net importer. During that period, every 1% weakening in the exchange rate was matched with an upward movement in grain prices of at least 0.5%.

Our situation is compounded by the fact that SA remains a net importer of wheat and rice, so during the 2015-16 marketing year, the country became a net importer of maize, wheat and rice due to the drought.

The result was that South African grain prices moved more closely in tandem with the exchange rate, to the extent that the exchange rate was the main influence on grain price movements during this period.

The demand for grains is expected to keep growing, while climate variability is expected to increase, which will invariably necessitate grain imports in the future. Data from Trade Map show SA imported 959,419 tonnes of rice (a secondary staple food) in 2016 at a cost of R6.1bn. This was R2bn higher than in 2015 due to the increase in the volume imported on growing demand, as well as exchange rate fluctuations.

Fortunately, in 2017, SA is set to harvest its second-largest maize crop on record, 14.3-million tonnes. Therefore, over the short- to medium-term, the indigent will be cushioned from higher import prices as we regain our maize net exporter status.

However, higher transport costs driven by a weaker rand remain a key risk. More than 80% of SA’s grain is transported by road. An increase in fuel costs will add to food prices.

The effects of downgrades will be felt strongly by the indigent, who spend proportionately more on food than the middle class and the wealthy. As a result, our policies need to look out for the indigent, who typically do not have much of a voice in policy debates.

Climate change has already compromised food security and created the need to import more grains and a weaker rand exchange rate only adds to the plight of the indigent.

Our economic policy formulation needs to become much more considerate to all the downstream implications of decisions taken.

OUR POLICIES NEED TO LOOK OUT FOR THE INDIGENT, WHO TYPICALLY DO NOT HAVE MUCH OF A VOICE IN POLICY DEBATES