Following the recent announcement of a cut in South Africa’s repo rate, the agriculture sector can look forward to some relief on loan repayments.
The decision by the South African Reserve Bank (SARB) to cut the repo rate by 100 basis points to 5,25% in response to the coronavirus disease (COVID- 19) pandemic should bring relief to farmers.
This is according to Paul Makube, senior agriculture economist at FNB Agri-Business, who said that the cut had come amidst the COVID- 19- induced global economic turmoil, a recessionary domestic economy, favourable inflation outlook, and lower oil prices.
The resultant interest rate cuts by commercial banks would alleviate pressure on the agriculture sector, especially those in drought-ravaged areas, by improving their cash flow and lowering debt repayments, he said.
Wandile Sihlobo, chief economist at Agbiz, concurred, saying that the interest rate cuts would bring some relief to indebted farmers. Total debt in the primary sector stood at around R168 billion in 2018.
According to Makube, the lower interest rates could also contribute to an improvement in local tractor sales, which had been in decline during the past few years. Figures published by the South African Agricultural Machinery Association had shown that tractor sales for 2019 were the lowest recorded in the past five years. Sales were down 22% from those of 2018.
However, tractor sales for February 2020 had shown a 46% month-on-month increase, Makube said,
He added that the lower interest rates would further boost consumer demand as disposable income improved after the COVID-19 restrictions were eased, and when economic activity returned to normality.
“This also comes at a time when sentiment in the agriculture sector has improved, as evidenced by the recent sector confidence index for the first quarter of 2020 from Agbiz.”
Makube said the weather outlook had turned positive mid-season, which saw an increase in the area planted, with a good crop growth forecast for maize of 14,6 million tons.
“Good rainfall replenished both soil and dam levels and improved crop and livestock prospects, which should help tame food inflation in 2020.
“Although South Africa’s CPI inflation rate edged above the midpoint of the SARB’s target range at 4,6% in February, the outlook still calls for the overall consumer price inflation to remain within the SARB’s target range of 3% to 6% in the year ahead, and into 2021.”
Prof Raymond Parsons, economist at North-West University’s Business School, said the decision by the SARB’s monetary policy committee to cut the repo rate was the right one to help mitigate the risk of COVID- 19 to the South African economy.
“While monetary policy is not a magic wand to eliminate the economic damage being caused by the pandemic, the SARB’s preparedness to take positive steps on this front is welcome.”
He added that the SARB’s confidence in the stability of the banking system was also welcome, but the bank needed to monitor liquidity stresses that might emerge.
“There’s going to be serious cash flow problems for many businesses in the months ahead. To successfully manage these demands will require banks and creditors to be accommodating [under] challenging economic circumstances.”
SARB governor Lesetja Kganyago said in a statement that despite the general increase in risk, the significantly lower forecast for headline inflation had created space for monetary policy to respond to the rapid deterioration in economic conditions.
“Barring severe and persistent currency and oil shocks, inflation is expected to be well contained, remaining below the midpoint of the target in 2020 and close to the midpoint in 2021.”
He added that effective monetary policy measures could ease financial conditions and improve the resilience of households and firms to the short-term economic implications of COVID-19.
“Our decision and its magnitude seeks to do this in the near term.”