South Africa at Risk of Credit Downgrade Due to Western Cape Drought

 

According to economic experts, Cape Town’s current drought situation is expected to have far reaching effects on the municipal and national economy. With a knock-on effect on the travel, agriculture, and even Business Insurance sector due to damage or loss of assets, Moody’s Investor Services have indicated that the drought could lead to another credit downgrade for South Africa.

 

The water shortage has led to increased expenditure from the city on its large-scale water supply projects, while both agriculture and tourism are suffering. As Cape Town spends more of its budget on creating alternative water sources, it is predicted that with less water available for the Cape’s fruit farms, less will be produced, and less bought locally and exported. Fruits used for consumption and to make juices and jams for example will then have to be imported, reducing the city’s profit from agricultural activity.

 

Furthermore, as the drought worsens, fewer tourists will be inclined to make their way to the city. As one of South Africa’s most popular tourist destinations, Cape Town sees 1.6 million people flock to its shores and spend around R40 billion per year. This is a vital contribution to the city’s economy on an annual basis. Additionally, the number of tourists sustains around 300 000 jobs in the tourism sector. According to South African Tourism CEO Sisa Ntshona, the drought will impact tourism not only in Cape Town, but also in other parts of the country as tourists end up cancelling their whole trip to the country.

 

 

The Western Cape contributes around 13% to the National Gross Domestic Product (GDP), and according to economist at Old Mutual, Rian Le Roux, if the Western Cape’s GDP reduces by 1%, the national GDP would reduce by 0.13%. This means that if the country’s economy only grows by 1.5% this year, the Western Cape’s economy will not have grown at all and the national GDP will only grow by 1.3%. As ratings agencies look at a country's overall economic growth during a review, this lack of growth could put the Western Cape and South Africa in a position for a credit downgrade.

 

As Capetonians and tourists do their part to limit their water usage, the Tourism Business Council emphasizes that plans have been put into place, and business and tourism continues as usual in this popular tourist and agricultural hub of South Africa.

 

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