As the coronavirus outbreak in China is fast spreading across other regions, the health implications present risks for global value chains. From a macroeconomic perspective, we have already seen organisations such as the Organisation of Economic Co-operation and Development slashing growth forecasts for the year.
Now there are also concerns from various South African stakeholders, who are worried about the potential effect of the coronavirus on their businesses. With SA’s agriculture being export-orientated and exports totalling about $10 bln in 2019, the potential for disruptions to global value chains is significant. This is especially true with respect to Asia, the epicentre of the outbreak and also an area that accounts for a quarter of SA’s agriculture exports.
There are two channels to consider when thinking about the potential implication of the virus for the SA agriculture sector. First, the supply side of the aforementioned products SA typically exports to Asia is in good shape, promising to be higher than that of 2019 because of improved domestic weather conditions. SA’s 2019/2020 summer grains production could increase by 26% year on year to about 16.8-million tonnes, according to the latest figures from the Crop Estimates Committee.
Moreover, the production of wine grapes and the fruit subsector in general is set to increase in 2020. All of this should ensure there will be a good supply of products to send to the global market. So, any decline in exports in the near term would be a function of softening demand rather than supply issues.
Second, with China having temporarily closed some of its manufacturing hubs and placed restrictions on human movements as a means of containing the spread of the virus, demand for production inputs will be affected negatively. What’s more, the longer Chinese manufacturers remain closed, the higher the likelihood that some might stop paying their employees, which would also have implications for consumer demand. This presents a risk for SA’s agricultural exports to Asia, which is worth about $2.5 bln a year.