Debt and banks the farmer’s new dread
TSA he ’effects s recent on sovereign the agricultural sector of credit rating downgrade to subinvestment grade by Moody’s Investors Service, with a negative outlook on the rating, could vary, but I believe there will be three major implications in the near term.
First there could be a deterioration in confidence levels in the agricultural and agribusiness sectors, and thereafter investment. The Agbiz/IDC Agribusiness Confidence Index (ACI) improved by six points to the neutral 50-point mark in the first quarter of 2020. This uptick was underpinned by improved rainfall conditions across the country. The ACI comprises 10 subindices, two of which are economic conditions in the country and capital investment.
With already challenging economic conditions being worsened by the Covid-19 pandemic and the lockdown, confidence levels could deteriorate in this particular subindex in the coming quarters. Capital investment sentiment could also deteriorate after the Moody’s downgrade. Ultimately, these two subindices will put a drag on the ACI. Subdued agricultural investment would be a setback to the government and the private sector’s goal of ensuring that agriculture is among the sectors that drive economic growth and provide muchneeded employment, especially in the rural areas.
Second, the volatility of the domestic currency could be a transmission channel for the effects of a subinvestment grade on agriculture. This would particularly be felt through the cost of inputs. SA imports about 80% of its fertiliser, 99% of the active ingredients in agrochemicals, and most agricultural equipment and fuel. The cost of these inputs could be affected by the weaker rand. Thus far lower oil prices have buffered what could otherwise have been steep increases in fuel and fertiliser prices.
Third, credit could be affected. Ordinarily, a downgrade to subinvestment level would be felt through a rise in the cost of capital, as the Reserve Bank would be likely to lift interest rates in response to possible exchange rate depreciation and associated inflation risks. But this time things are slightly different. The Covid-19 pandemic has disrupted global supply chains, which subsequently slowed economic conditions. Several central banks, including the SA Reserve Bank, have responded by reducing interest rates as a way to ease financial conditions and stimulate economic activity.
This means the cost of capital has been somewhat reduced amid Covid-19. The main transmission of a subinvestment grade could now be through capital flight. It is quite plausible that some financial institutions will become more risk averse when it comes to lending, especially to already highly geared farmers.
SA’s farming sector is heavily in debt. As of 2018 total farm debt was at a record R168bn. About 60% of the debt is with the commercial banks, 29% with the Land Bank and the rest spread among agricultural cooperatives, private individuals and other institutions. The escalation of debt, particularly in more recent years, was because of both the expansion in area farmed, specifically in horticulture and to some extent the financial pressure brought by unrelenting droughts, which have strained agricultural output on various farms over the recent past.
Ultimately the economic conditions will be challenging for every sector of the economy. While the response to deteriorating credit ratings will largely be macroeconomic and specifically fiscal, the agricultural sector could focus on ensuring the continuous adoption of climate-smart farming techniques. This includes the adoption of costeffective technologies that can help the sector adapt to changing climatic conditions. Another key policy precondition for growth involves securing property rights to attract investment.
Sihlobo is chief economist of the Agricultural Business Chamber of SA and author of Finding Common Ground: Land, Equity and Agriculture.