The Budget, the Drought and ... Life in Economy Class
Thoughts on South Africa’s Budget Speech
In one word...underwhelming
It seems a little bizarre to be writing about a drought when the front cover of The Star newspaper shows pictures of a flash flood in Johannesburg yesterday that killed a schoolgirl and damaged vehicles and property. At the same time though, Stats SA announced that 37,000 jobs had been lost in the agricultural sector due to the drought. So, what exactly is going on and what are the economic implications?
Rainfall in South Africa is highly variable. Historically, a 20% drop in rainfall below its long-term average has been sufficient to cause crop and water shortfalls as well as social and economic hardship. A deficit of 25% is normally regarded as a severe meteorological drought. Unfortunately, according to the South African Weather Service there were 8 summer rainfall seasons between 1960 and 2004 where rain in the summer rainfall area was 80% below normal. SA is particularly susceptible to drought because the rainy season in most of the country is only 6 months long and because dry weather results in blue skies and abnormally high temperatures that increase evaporation, stressing plants and depleting surface water reserves. The drought of 2015 / 2016 is due to a stronger than normal El Niño phenomenon and is the worst drought in 104 years.
The impact of a drought is felt first in agriculture. Annual maize production in SA is around 12 million tons. The 2014 crop was strong and came in at 14m tons. Unfortunately the crop in 2015 was down 30% at 9.955m tons and 2016’s crop is only expected to be 7.438m tons (down 47% on 2014). SA is normally a net exporter of grains, but according to GrainSA, the country will now need to import nearly 4m tons of maize at a cost of R14 billion. There is also a risk that this figure will be revised upwards as the 2016 maize production estimate, by the National Crop Estimates Committee, is aggressive compared to market expectations of 5.5 – 6.5m tons. The reason for the discrepancy is that a substantial portion of the crop has been planted very late in the season. A maize plant needs around 150 days to ripen, so if there is frost in April or May, there will be substantial crop losses. Even though we are now getting decent rainfall, it has come to late to provide comfort around maize production targets.
The impact of the drought then filters through to consumers through food price inflation. Wholesale prices of white maize in SA are up nearly 60% over the past 3 months. The drought is of course affecting most of Southern Africa. Maize prices are 73% higher than average in Malawi, 50% higher in Mozambique and 53% higher in Zimbabwe.
One-in-five households in SA is already “food-insecure” and the agricultural sector employees around 500,000 people. According to the World Bank the drought in SA will push an additional 50,000 people below the poverty line (defined as an income of <R501 per month – 36.5% of people fall into this category)
Moody’s has commented that the drought (and weak rand) are aggravating SA’s economic slow down and that there is now a possibility of near-zero growth or a recession in 2016. SA’s government has so far resisted calls to declare the drought a national disaster. This may be a moot point as SA has already used up its R5bn contingency reserves by paying public servants a 10.1% salary increase. Finance Minister, Pravin Gordhan, did however manage to reprioritize R1bn in this week’s budget announcement for drought relief, but this falls far short of the R12bn over 3 years requested by Agri SA.
South Africa will always be at risk of devastating droughts; the bigger problem is that the country may not have the resources to do anything about them.
(The Star, South African Weather Service, UN FAO, SABC, Reuters, Daily Maverick, Bloomberg, Moody’s)
Flying in the Back... leading from the front
outh Africa’s Finance Minister, Pravin Gordhan, flies economy class back to Johannesburg following the State of the Nation Address in Cape Town. At more or less the same time SAA requested a further R5bn bailout from the treasury....they needed to sell that extra business class ticket Mr Gordhan.
Dr Andrew Louw CFA