Drought pushing SA to the brink of recession - Moody's

Moody's says the worst drought on record in South Africa is aggravating the ongoing economic slowdown.

Carcas of cattle lost in the drought lie in a field in the Free State.  Picture: Christa Eybers/EWN.

JOHANNESBURG - South Africa's worst drought on record risks tipping an already weak economy into recession as rising agricultural imports feed into rising inflation, ratings firm Moody's said on Tuesday.

"The worst drought on record in South Africa is aggravating the ongoing economic slowdown, threatening near-zero growth if not a recession in 2016," said Moody's Senior Vice President and lead analyst for South Africa Kristin Lindow.

A severe drought caused by an El Nino weather system has swept across southern Africa since mid-2015, threatening the maize crop, which serves as a staple in the region, forcing countries like South Africa to up imports to plug the shortfall.

"Normally a net exporter of grains, South Africa will now need to import substantial amounts of grain to compensate for domestic production shortfalls," Lindow said.

Inflation figures due on Wednesday are expected to show consumer prices rising just short of 6 percent, the South African Reserve Bank's upper target.

South Africa's central bank raised its benchmark interest rate by half a percentage point in January, after raising it by a total of 50 basis points in 2015, citing the deteriorating inflation outlook.

"We expect this to lead to more rapid and sizeable monetary tightening that will further restrain growth," Lindow said.

"The increase in rates will serve as a further brake on an already weak economy, with an intensifying drought aggravating existing problems that have taken their toll on investor confidence over the past year," Lindow said.

The central bank slashed its 2016 growth forecast to 0.9 percent from 1.4 percent previously, while the International Monetary Fund sees growth at only 0.7 percent in 2016.

Moody's said the drought would also stretch South Africa's already wide trade and current account deficits.

South Africa is targeting a budget deficit of less than 4 percent, and Finance Minister Pravin Gordhan is expected to announce a raft of cost cutting measures when he delivers his speech next Wednesday.

Moody's currently rates South Africa's debt at two notches above sub investment, but with a negative outlook. Fellow ratings firms Fitch and Standard and Poor's have South Africa just one notch above junk.