The ongoing debate regarding the recent downgrade of South Africa's credit score to sub-investment grade has been dominated by the middle class and the wealthy due to information asymmetry, rather than the indigent that are most likely to be negatively affected.
This is quite unfortunate since the indigent will be one of the hardest hit population groups, particularly through higher food prices and exorbitant lending rates. Data from Statistics South Africa shows that over 15 million South Africans rely heavily on staple foods such as grains for their daily meals.
One of the more direct impacts of the downgrade is reflected in the depreciation of the rand. While the implications are manifold, a weaker rand has a significant impact on staple food prices - grains.
A simple illustration of this would be to look at the correlation between imported grain prices and the rand exchange rate. When the rand is weak, the price of imported grains typically increases, which adds further strain to an already strained indigent population.
South Africa 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 percent weakening in the exchange rate, was matched with an upward movement in grain prices of at least 0.5 percent.
Our situation is compounded by the fact that South Africa 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 much 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 effects of downgrades will be strongly felt by the indigent that spend proportionately more on food than the middle class and the wealthy.
The demand for grains is expected to keep growing while climate variability is expected to increase in frequency and intensity which will invariably necessitate grain imports in future. Data from Trade Map shows that in 2016, South Africa imported 959,419 tonnes of rice (a secondary staple food) at a cost of R6.1 billion. This was R2 billion higher than 2015 due to the increase in the volume imported on the back of growing demand, as well as the exchange rate fluctuations.
Fortunately, in 2017, South Africa is set to harvest a second largest maize crop on record, 14.3 million tonnes. Therefore, over the short to medium term, the indigent population 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. Over 80 percent of South Africa's grain is transported by road. Therefore, an increase in fuel costs, as a result of the weaker exchange rate, will add to food prices.
The effects of downgrades will be strongly felt by the indigent that spend proportionately more on food than the middle class and the wealthy. As a result, our policies also need to look out for the indigent that typically does not have much of a voice in policy debates.
Climate change already compromises food security and creates the need to import more grains, and a weaker rand exchange rate only adds to the plight of the indigent. Domestic production of wheat continues to play catch-up with demand which perpetuates the exposure of the indigent to higher food prices.
Our economic policy formulation needs to become much more considerate to all the downstream implications of decisions taken.
This blogpost is an extract from my Business Day Column, published on 13 April 2017