Cape Town - US financial services company Morgan Stanley estimates that the negative impact of the drought could further trim SA exports by about $9.5bn (about R158bn), according to a quarterly review by Momentum.
Dry and hot weather conditions threaten to further shave off between 0.5% and 1.0% from South Africa's gross domestic product in 2016 should agricultural volumes be hit in excess of 20%, according to Herman van Papendorp, head of macro research and asset allocation at Momentum, and economist Sanisha Packirisamy, also of Momentum.
Real growth in SA is likely to expand at a rate only marginally higher than 1.0%, they estimated in their quarterly market and economic review for the fourth quarter of 2015.
"As a result of lower domestic agricultural output, higher food imports are expected to partly negate the impact of slowing import demand as weak local demand and a higher rand price of foreign-produced goods curb consumer imports," they explained.
"Rising fiscal pressures, a dismal employment outlook and a dip in real wages are likely to inhibit a faster acceleration in consumption spend in 2016, while the export benefit of a weaker rand is likely to be curbed somewhat by fragile global trade activity and rising input costs."
This is while growth rates in SA’s primary and secondary sectors have already been punctured by soft global commodity prices and subdued demand, both globally and locally.
Rate hikes in pipeline
As for interest rates, Van Papendorp and Packirisamy said with inflation threatening to breach the upper target of 6% on average this year, they expect 75 basis points worth of rate hikes over the course of 2016. This would be "to keep inflation expectations anchored and real policy rates in positive territory, particularly against the backdrop of further interest rate hikes by the Fed in response to firmer US growth".
The SA Reserve Bank has warned that the recent convergence in medium-term inflation expectations at close to the upper end of the 3% to 6% inflation target band creates a further risk of price increases.
"A more benign structural growth outlook and shrinking fiscal buffers leave SA’s fiscal authorities with less room to manoeuvre, jeopardising Treasury’s fiscal consolidation timeline and medium-term debt stabilisation plan," said Van Papendorp and Packirisamy.
"An escalating public service wage bill and rising debt-servicing costs have crowded out other forms of more beneficial growth-enhancing spend and remain a trigger for further negative sovereign ratings action towards sub-investment grade status."
They said doubts around the direction of economic policy have discouraged inward investment. This limits revenue collections on a more sustainable basis, restricting SA’s ability to grow its way out of a potential debt crisis in the absence of another commodity super-cycle.
"Earlier student protests, the recent finance ministry debacle and inaction to reduce maladministration in SA’s state-owned corporations have raised concerns over government’s ability to deal with socio-political and economic challenges," they added.
"A larger debt burden, reduced sovereign creditworthiness and lower inward investment would perpetuate a poor growth environment, fuelling a weak growth-high debt spiral."