Ratings agency warns South Africa on economy

South Africa’s worst drought in decades could push its already weak economy into recession as rising agricultural imports fed into rising inflation, ratings firm Moody’s said.

“The worst drought on record in South Africa is aggravating the ongoing economic slowdown, threatening near-zero growth if not a recession in 2016,” Moody’s senior vice-president and lead analyst for South Africa Kristin Lindow said on Tuesday.

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.

Moody’s said while agriculture represented less than 4 percent of both gross domestic product (GDP) and employment, as well as less than 11 percent of exports, negative spillovers from the sector would increase food inflation and imports. It said this would motivate policy responses that would further depress already sluggish growth.

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.