South Africa's worst drought in memory adds to economic gloom

by Reuters
Thursday, 14 January 2016 16:06 GMT

A dried maize cob is seen at a field in Hoopstad, a maize-producing district in the Free State province, South Africa, January 13, 2016. REUTERS/Siphiwe Sibeko

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The drought could push up the jobless rate and widen the gap between rich and poor

* Drought threatens growth, may fuel inflation

* Economic gulf contributes to racial tensions

* Data discouraging but finance minister sees no recession

By Ed Stoddard

HOOPSTAD, South Africa, Jan 14 (Reuters) - Driving his pick-up truck down a dirt road, farmer Petrus Roux points to scorched fields that should be a sea of green maize, part of South Africa's western grain belt.

The worst drought in over a hundred years has devastated crops and could tip the economy into recession, adding to a loss of investor faith in President Jacob Zuma, pushing up food prices and possibly stoking social and racial tensions ahead of local elections.

"As far as the eye can see, empty fields," Roux said, pointing to pastures seared a rusty red.

Alongside record temperatures there has been a stampede from South African assets beyond the wider flight from emerging markets. The rand has fallen sharply and analysts say a credit ratings downgrade to "junk" status is possible.

Agriculture only contributes 2.2 percent to economic output, but a major farming contraction could turn slow growth into recession. This could push up the jobless rate from around 25 percent and widen the gap between rich and poor, factors already contributing to political tensions and exposing the racial rifts that Nelson Mandela tried to heal after years of apartheid.

Online racial abuse spiked in the last month and police had to deploy razor wire this week to separate crowds of whites and blacks protesting outside the court appearance of four white farmers accused of beating two black men to death.

Sim Tshabalala, the head of Standard Bank, one of South Africa's largest banks, said on Wednesday that racism and inequality were weighing on the economy.

"There is pressure in the society over economic decline and that pressure is playing out on social platforms," said Gary van Staden, political analyst with NKC African Economics.

ELECTION CHALLENGE

Africa's most industrialized economy grew 0.7 percent in the third quarter but that was after shrinking 1.7 percent in the previous three months. Some analysts are expecting a recession, usually considered to be two consecutive quarters of contraction, in 2016.

This would make it harder for the ruling African National Congress, in power since the end of white-minority rule in 1994, to overcome a serious challenge from the liberal Democratic Alliance Party and the ultra-left Economic Freedom Fighters in mid-year local elections.

Finance Minister Pravin Gordhan said on Thursday the economy was not heading for recession. The government is forecasting growth of 1.5 percent in 2016 but recent indicators are downbeat.

The rand, also hit by the slump in global commodity prices, slid 25 percent in 2015 and last week briefly plunged 10 percent to a record low of 17.995 to the dollar. This could push up inflation, currently 4.8 percent year-on-year, particularly if food is imported to compensate for the loss of domestic supply.

Manufacturing output, which accounts for more than 12 percent of the economy, fell in both October and November. Finance, real estate and business services, the single largest contributor to output at around 20 percent, expanded 2.8 percent in the third quarter but is expected to slow.

Agriculture, a particularly volatile sector, could make the difference. A 20 percent contraction in farming output, for example, could shave 0.4 percent off overall growth, analysts say. It shrank 12.6 percent in Q3 after declining 19.7 and 18 percent in the previous two periods.

"We are anticipating a recession this year and agriculture and the drought will be big parts of that," said George Glynos, an analyst at Johannesburg-based financial consultancy ETM.

EXPENSIVE MAIZE

A rise in food prices, a significant portion of spending for lower-income South Africans who are overwhelmingly black and many of whom have seen little economic improvement since the end of apartheid, could also contribute to tensions.

South Africa may need to import as much as 5 million tonnes of maize this year, roughly half its requirements, producer group Grain SA said last week.

The maize crop last year, when South Africa recorded its lowest average rainfall since records began in 1904, was down a third to under 10 million tonnes and the harvest is expected to be much lower this year. Africa's biggest maize producer is usually a net exporter of the grain.

Futures prices for white maize, the main food staple for lower-income households, more than doubled last year because of the drought.

"We expect general food prices to increase by 15 to 20 percent this year because the drought is hitting everything," said Christo Joubert, head of the food price monitoring arm of the National Agricultural Marketing Council.

That would increase political pressure on Zuma, already under fire for triggering financial turmoil by changing finance ministers twice last month.

The central bank has repeatedly warned about drought and food prices and is expected to raise interest rates at the end of the month to curb inflation pressures.

Analysts say Zuma has few tools to deal with the brewing problems and expect the ANC to spend money to win over voters.

"The problem that underpins the annus horribilis of 2016 is no policy interventions to stop the backward slide. And with the local elections coming up you will see fiscal indiscipline," Van Staden said.

(Editing by Ed Cropley and Anna Willard)

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South Africa's worst drought in memory adds to economic gloom

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