T RA D E N E W S
•••
Impact of exchange rate depreciation
on the agricultural sector
MR LUAN VAN DER WALT, DR YONAS
BAHTA AND DR DIRK STRYDOM
AGRICULTURAL ECONOMICS - UFS
T
he South African financial
sector has a good rating
amongst international markets
in terms of competitiveness and
investment opportunities. According to a study done by the
World Economic Forum in terms
of competitiveness, South African
financing through local equity
markets is ranked first out of 140
countries, while the regulation of
the securities exchanges is ranked
second for 2015/2016. This is a
good indication of the quality of
the South African financial sector.
A good financial sector can play a
huge role in a country’s economy
in order to attract foreign investors. New investors can then assist
with the country’s balance of payments.
Various economic indicators
are used to determine a country’s
financial welfare. One important
measure is the exchange rate. In the
South African context the main
indicator in terms of trade is the
South African Rand (ZAR) relative to the US Dollar (US$). The
exchange rate is influenced by a
number of external factors, which
makes it highly volatile and difficult to project. Examples of these
factors are inflation rate, interest
rate differentials, current account
deficit and even the economic and
political stability globally.
The South African economy was under a lot of pressure
in 2015, created by a number
of external factors. The factors
ranged from political issues to the
struggling economy of China and
restructuring of global economies.
The political situation in South
Africa caused a lot of pressure in
the different sectors. The mining
sector was under a lot of pressure
because of the strikes, which led
to reduced output and high commodity prices globally, which decreased substantially. The shortage
of electricity supply, which resulted in load-shedding, also cost the
economy a lot of money. The output by the manufacturing sector
was under a lot of pressure, which
led to losses in the economy. All of
these factors affected the exchange
rate. The South African business
confidence as well as the credit
rating was downgraded several
times during 2015. The business
confidence index decreased from
49 in the first quarter of 2015 to
36 in the fourth quarter of 2015,
while the South African credit
rating is just above junk status,
with the fear that the credit rating
might be downgraded to junk
status if the current economic situation does not improve over the
next few months. The dismissal
of the Minister of Finance by the
Figure 1: Exchange rate for the R/$
President also resulted in a lot of
pressure on the exchange rate. All
these factors influenced business
confidence and if the international
investors decide to withdraw their
investments from South Africa, it
will cause further depreciation of
the rand.
IMPACT ON AGRICULTURAL
SECTOR
The sudden depreciation of the
rand against the major currencies
and especially the US$ was a big
shock, since no one had forecast
the sudden depreciation. The effect
of the depreciation will be visible
in the agricultural sector and this
effect can be positive or negative.
The main effect of the depreciation
of the rand on the agricultural
sector will be in terms of imports
and exports. The export industry
will benefit from the depreciation
of the rand, while the import
industry will take a big knock.
Exporters will gain higher incomes
while importers will pay more in
order to import the same volume
of goods.
The exchange rate depreciated
by 29% from January 2015 up to
SOURCE: SOUTH AFRICAN RESERVE BANK
SENWES Scenario • Feb/Mar 2016
21