When Covid-19 is under control, SA’s economy will not reboot immediately

As the Covid-19 pandemic escalates both globally and domestically, concerns are mounting at an exponential pace about the ultimate effects on the SA economy.

The country was already in recession when Covid-19 hit our shores, and the Moody’s Investors Service credit rating downgrade to subinvestment grade was likely even before the lockdown due to SA’s stalled growth momentum, ballooning fiscal deficits and slow progress with essential structural reform. Notably, Moody’s has retained a negative outlook on its new rating.

With the global economy now likely to enter a fierce recession, SA looks set for a very cold economic winter. Absa recently forecast that GDP in SA would contract in the second quarter by 23.5% quarter on quarter after seasonally adjusting and annualising the data, with particularly hard knocks for mining, manufacturing and various service industries supporting tourism, which has now come to a dead stop.

At this stage no-one knows when the pandemic will be brought under control, nor what the multiplier effects of different negative economic shocks will bring. Covid-19 is a health shock that has mutated into a complicated tangle of a demand shock, a supply shock and a financial shock, all coming together at a time when SA was poorly fortified economically to deal with it.

We assumed in our recent forecast that some partial growth recovery would be likely in the third quarter, and that overall the country would post a GDP contraction of about 3% in 2020. However, as we warned then, the risks were, and still are, skewed heavily to the downside here, and they are likely to have mounted in the short time since we published that forecast.

If the need for strict social distancing measures, which keep firms shuttered and people sequestered at home, lasts for longer than currently envisaged, the economic hit will be greater than we initially envisaged. With SA having reported the first confirmed coronavirus cases in some of its densely populated townships, Italy's experience provides a sobering warning — the government there has now warned that the national lockdown, which was initially supposed to end on April 3, will instead be very long and lifted only gradually.

Italy's population is only slightly larger than SA's, and it is considerably further along the pandemic incidence curve, with nearly 106,000 confirmed cases (compared to SA's 1,353 as of March 31) and nearly 12,500 deaths.

Positively, there is a possibility that SA’s relatively early rise to the challenge compared to some hard-hit countries that were caught more unawares will shepherd the country through the crisis relatively lightly.

But this is a hope, rather than a strong likelihood. Widespread poverty and consequent crowding in densely populated townships, high rates of potential comorbidity factors such as HIV and tuberculosis, and a weak public healthcare system, suggest the crisis could easily escalate sharply here too. It is unclear how long the draconian social distancing measures, with their attendant costs on the economy, will need to last to bring Covid-19 under control.

Moreover, even assuming the pandemic is brought under control by the end of the third quarter, the economy is unlikely to reboot immediately. Many parts of the economy will be damaged in the intervening period: firms will close, people will lose their jobs, capital will have fled to safety. This will not be easy to recover from. The Reserve Bank has introduced substantial measures to ease financial conditions in SA, including 125 basis points of interest-rate cuts since the end of 2019. We think another 50 points of easing are likely in May.

Additionally, the Bank has implemented a range of other measures to secure essential liquidity in SA’s financial markets, including a watershed decision to buy government bonds as needed to secure orderly financial markets.

However, monetary policy measures are unlikely to be enough to lift the economy out of intensive care. Rather, substantial fiscal medicine is needed. Alas, the medicine is exceptionally expensive in SA, which had no fiscal buffers to speak of entering the crisis and pays a high real interest rate for the spending medicine.

The Treasury has announced various steps to support the economy including, most notably, an expansion of the eligibility criteria for the employment tax incentive to encourage firms to hang on to their workforce during the crisis. The value of this measure is estimated at R10bn, while the other two measures — the deferral of PAYE and provisional tax for small and medium-sized enterprises — will cost the fiscus R5bn.

The R15bn may seem a large amount to help SA’s economy get back on its feet, but it is not. It amounts to about 0.3% of GDP. Elsewhere, particularly in wealthy developed countries, governments are rapidly ramping up their spend.

SA’s government is also likely to have to lift its assistance to firms and workers (including 2.9-million citizens who were eking out a living in the informal sector as of the fourth quarter of 2019) and the question of how this can be financed remains unanswered, especially since bond yields have shot up amid investors’ flight to safety.

For now, however, finance minister Tito Mboweni has said he is keeping his options open about approaching international financial institutions for help. It’s not yet clear, however, exactly which sorts of programmes will be both available and palatable to a country such as SA, which faces unique challenges. Ultimately, we are going to need not only enhanced spending on healthcare, but also probably much higher levels of support for hard-hit firms and consumers who have lost their jobs.

Meanwhile, President Cyril Ramaphosa’s authoritative handling of the Covid-19 crisis may, ultimately, place him in a stronger position politically to drive a far-reaching structural reform agenda — covering agriculture, mining, energy, telecommunications, transport, finance, state-owned enterprises and the public service — that could sharply lift SA’s growth potential.

In the meantime, financing for the immediate needs is essential. If regular bond issuance is seized up, perhaps a tax-free Covid-19 solidarity bond aimed at retail investors might be an idea worth considering. But the state should also begin exploring options with international financial institutions.

• Worthington is Absa Group senior economist.