Impact of downgrade on agriculture

By: Philip du Preez, Head of Agriculture at Mutual & Federal

South Africa has recently been plagued with the news of a downgrade with S&P Global and Fitch downgrading South Africa to junk status. As with all other sectors in the economy, the downgrade will have severe consequences on the agricultural sector in South Africa.

The weaker rand will have an immediate impact on imports and if once considers that most agricultural machinery and equipment is imported, a weaker SA rand will lead to an increase in the importation of this equipment. If one further considers the expected increase in interest rates, one can only imagine the pressure this will have on the industry, an industry that is already in distress due to the droughts.

Farmers rely in financing from banks and agricultural companies and the expected increase will put a lot of pressure on the costs of finance for these farmers. Inevitably, farmers will have to get more done with a lot less money. This could lead to job losses in specific areas where the country already suffers job losses and will have a devastating impact on the economy, especially in small towns. Furthermore, food security is also under threat and it is not impossible that the downgrade could turn South Africa into a net importer of more commodities.

From an insurance perspective, we believe that the market will have to go back to basics. Brokers will have to make sure that their clients have the best cover possible to suit the risks – which does not mean the cheapest premiums but rather the best cover at the most reasonable price. We expect that the market will demand that clients be seen more often and that portfolios will have to change rapidly.