Faced with the prospect of a huge escalation in Covid-19 infections and a deep recession, President Cyril Ramaphosa launched a salvo of fiscal and containment measures on Monday night, adding SA to the ranks of countries that have imposed national lockdowns.

The president pledged to use all measures within his power to offset the economic costs of the crisis — an undertaking that was extended to the SA Reserve Bank, which Ramaphosa said is ready "to do whatever it takes" to keep the financial sector well oiled.

It was a commendable sentiment and, analysts believe, exactly what Bank governor Lesetja Kganyago should have said at last week’s monetary policy committee meeting.

Even though the Bank cut the repo rate by one percentage point, its initial reluctance to use money-market measures to ease market liquidity rattled the markets. If Kganyago’s sanguine response was meant to convey calm, it misfired badly, given that most major central banks are using every tool at their disposal to combat the outbreak.

Ramaphosa looked as if he too was in danger of falling behind the curve when he cancelled a scheduled address to the nation on Sunday night. But on Monday, he brought his A-game when it mattered.

The president said, rightly, that he had no choice but to go big if the government is to prevent "a human catastrophe" in which hundreds of thousands could be infected within weeks. While conceding that a three-week lockdown — in which nearly all businesses and industry will be closed — will hit the economy badly, Ramaphosa said "the human cost of delaying this action would be far, far greater".

Then he announced a wide range of support measures (many uncosted and open-ended), promising that this is only "the first phase" and that more measures will be rolled out as needed. His intent can’t be faulted, but again, the devil is in the detail.

Ramaphosa’s reluctance to put any price tag on these measures makes it difficult to conclude that the response is too conservative. But at first glance the plan, though well targeted, appears modest — in keeping with the country’s fiscal constraints.

‘Retrenchments still likely’

Unlike the US and parts of Europe, SA is not throwing the kitchen-sink equivalent of monetary and fiscal policy at the virus in the hope that something will act as a floor under collapsing markets and plunging output.

Counting only the measures that the president costed in his speech, the government pledged about R3.8bn in direct financial support to distressed firms and affected workers, and another R8bn in tax subsidies (through forgone tax revenue).

So far it has chosen not to tap section 16 of the Public Finance Management Act, which would allow the National Treasury to access R39bn in emergency spending this fiscal year. Perhaps he’s keeping that powder dry until later in the game.

The most significant measures include a temporary employee relief scheme and a new national disaster benefit, whereby the state will tap the reserves of the Unemployment Insurance Fund (UIF) to subsidise wages of workers at firms in virus-related distress. (The fund has an NAV of more than R150bn and was expected to post average annual surpluses of R3.6bn over the medium term, according to the Treasury.)

The SA Revenue Service is also coming to the party. It will provide a tax subsidy of up to R500 a month for the next four months for private sector employees benefiting from the Employee Tax Incentive and earning below R6,500 a month — a move that could potentially help more than 4-million workers.

It will also allow small and medium enterprises (SMEs) with a turnover of less than R50m (about 75,000 firms) to delay a portion of their pay-as-you-earn and provisional corporate income tax payments over the next few months.

"Though a wide range of support measures were offered, in reality they are shallow by size and impact," says Intellidex’s Peter Attard Montalto. While they will keep some businesses alive and some people employed, he doesn’t believe the package will provide enough support to really move the dial on SA’s GDP growth.

Easing monetary policy and adopting an expansionary fiscal stance, which protects SMEs and jobs, is the right approach, says Sanlam Investments economist Arthur Kamp.

"The measures announced will help. Even so, I think retrenchments will still increase materially, since corporate profits are already depressed," he says.

Still, Citibank economist Gina Schoeman thinks Ramaphosa struck the right note. "The risk of going too far is that the economic fallout ends up creating a far worse socioeconomic problem down the line. But by supporting the economy in the ways announced, and by still providing for essential services, it seems a good balance as far as we can tell," she says.

"The benefit of a lockdown is that it’s the only way to get ahead of the health and social upheaval that would cause catastrophic economic problems anyway," she says. "Of course, a risk is that the 21-day lockdown persists for longer — but only time, testing and confirmed cases will determine that."

There have been financial crises, recessions and bear markets before, but the scale and nature of this interruption to daily life and economic activity is on a completely different level
Izak Odendaal & Dave Mohr

It also remains to be seen to what extent big business will step in where SA’s lack of fiscal space prevents the government from doing more. Economists expect that the banking sector will have to do a lot of the heavy lifting in granting forbearance to firms and consumers over the coming months.

Schoeman says future Bank action will hinge partly on the extent to which the banking sector responds, given that payment holidays and term extensions provide a far greater stimulus to consumers than rate cuts. Even so, she is forecasting another 50 basis point cut at the Bank’s May meeting — though she wouldn’t be surprised to see it step in earlier with a bigger cut.

A record contraction?

Before Monday’s announcement, the growing consensus was that the SA economy would contract by more than 1% this year. Now, thanks to this lockdown, that is likely going to shift to -2% or worse.

Absa economist Peter Worthington estimates SA could be set for a record GDP contraction of about 23.5% in the second quarter — if the lockdown is not extended beyond three weeks. But even if the economy recovers slowly from the third quarter, he expects SA’s full-year figure to be as low as -3%.

"We are in deep trouble here," agrees Kamp. "The global economy has hit a sudden stop. The recession is going to be worse than during the global financial crisis."

During the 2008/2009 crisis, the SA economy slowed by -1.5%. But, as Old Mutual Wealth strategists Izak Odendaal and Dave Mohr point out, "there have been financial crises, recessions and bear markets before, but the scale and nature of this interruption to daily life and economic activity is on a completely different level".

"The isolation measures are thus absolutely necessary, but never before have governments deliberately shut down large parts of their national economies in peacetime. And they are all doing it at once."

The global picture is equally nasty.

Capital Economics expects most economies to contract 10%-20% in the first or second quarters. It has marked down its 2020 global growth forecast from 2.9% year on year to -1%. That would eclipse the -0.5% fall in output during 2009. In fact, it would be the worst year for the global economy since the 1940s. The International Monetary Fund (IMF) also expects global growth to be negative in 2020 and is forecasting a recession as bad, if not worse, than during the 2008/2009 crisis.

The most bearish forecasters on SA, before the lockdown was announced, were Goldman Sachs, with a real 2020 GDP forecast of -2.6%, followed by Intelli- dex with -2.3%. Both estimated that if growth were to slow to this extent, and there is significant virus-related fiscal spending at the same time, SA’s consolidated budget deficit could blow out from an expected 6.8% to above 10% of GDP this fiscal year. This would push the debt ratio above 70% by early 2021.

Kamp agrees: "Our economic downturn is about to deepen sharply in the second quarter, leaving a large hole in government revenue. We are probably heading for a double-digit budget deficit this year and the debt ratio can be expected to increase above 80% of GDP over the next three years."

We are in deep trouble here. The global economy has hit a sudden stop. The recession is going to be worse than during the global financial crisis
Arthur Kamp

It doesn’t help, Kamp points out, that global financial conditions have tightened abruptly. Investors have withdrawn $83bn from emerging markets since the beginning of the crisis — the largest capital outflow ever recorded. They’re now seeking safety in cash, mainly in the form of dollars. As a result, higher risk is being priced into emerging-market sovereign debt. The yield curve on SA government bonds has steepened and the currency has fallen sharply.

Attard Montalto estimates that funding a 10.8% fiscal deficit would require the government to issue 36% more debt — at a time when SA government bond yields have spiked above 11% from about 8% a month ago.

So far, SA has still been able to issue new debt at these elevated yields without too much trouble. But if yields remain at this level, huge pressure on government finances will result, say Odendaal and Mohr.

"Now more than ever, we cannot afford wasteful and irregular spending," they argue. "Every rand needs to be put to very good use, since it will have to be borrowed at a punishing interest rate."

In a pinch, the IMF remains an option. With nearly 80 countries now requesting its help, the IMF has pledged to vastly step up emergency finance, and it stands ready to deploy all its $1-trillion lending capacity.

Eventually, the outbreak will blow over. Capital Economics chief economist Neil Shearing expects that most economies will resume their pre-crisis growth paths within a year or two, albeit with some permanent loss of output.

What it means:

Ramaphosa has struck the right balance between containment and support measures with a well-targeted package in keeping with SA’s fiscal constraints

However, this assumes that governments stand behind otherwise solvent firms and the banks; consumers and businesses recover their "animal spirits"; and bond markets tolerate higher debt burdens.

"If any of these conditions do not hold, or if the virus or something like it returns, then it’s likely that economies will settle on a lower path of GDP," he warns.

SA, which was already in a recession and simmering fiscal distress before the virus hit, should brace for a steep economic contraction this year.

Whether growth rebounds sustainably after that depends on whether the government shows the same boldness in instituting pro-growth economic reforms as it has in tackling the virus.

It will have to, since punishing fiscal austerity will be necessary once the crisis fades and the fiscal bill becomes due.

One thing’s for sure — life will never be the same again.