The Coronavirus pandemic and its potential impact on the South African economy

A coronavirus named COVID-19, is posing one of the biggest global threats to humans currently alive. The pandemic is having a dramatic impact on the way in which people interact, socialise and conduct their economic activities. The number of people succumbing to the disease since December last year, has not been nearly as high as other worldwide reported causes of death during the same period, such as heart disease, cancer, accidents, normal flu, etc. However, the ease of transmission of the virus and the possibility that infection numbers may rapidly escalate exponentially, have seen the introduction of drastic measures globally in an attempt to contain the spread of the virus.

By Monday, 23 March, the worldwide reported infection number stood at more than 350,000 with nearly 15,500 deaths and just over 100,000 infected persons who have recovered. In South Africa, the virus was initially introduced by people having travelled abroad. But locally transmitted infections have also occurred, and have pushed the number of total confirmed infections to over 400, with two persons having recovered. Thus far no deaths have yet been reported.

Economic impact

Clearly, the current pandemic leaves the world in uncharted territory – both in terms of the social and health impacts and its possible effect on global production, employment and growth. Market reaction on most international stock exchanges has seen large scale panic sales of shares and flight to safe haven (especially US) destinations. Market volatility has risen to staggeringly high levels.

Data pertaining to sectoral performances will only be available in three to six months’ time. But recent price developments on the JSE already gives some indication of investor sentiment towards sectoral earnings expectations. As can be seen from the graphs, the chemicals index, owing to Sasol’s huge decline which was in turn caused by the slide in crude oil prices, has been the worst performer in terms of year- on-year price movements, followed by industrial engineering, travel & leisure, and household goods. Gold mining and pharmaceuticals were the only two sectors which recorded year-on-year price increases.

Governments worldwide have declared themselves ready to revert to fiscal stimulation, quantitative easing and the lowering of interest rates in an attempt to support consumer spending and private sector investment and to keep bank credit lines and real sector production and supply chains open and functional.

South Africa does not have the luxury of a safe haven currency (the US dollar) and therefore cannot put the “printing press” to work to create unfettered liquidity. Given an already high deficit ratio and spiralling debt, South Africa will probably also not be able to rely much on fiscal policy measures. National Treasury has around R1.4 billion available in disaster management funds and a further R5 billion in contingency reserves to help businesses and individuals deal with the economic fallout from the coronavirus and the national state of disaster. Invoking section 16 of the Public Finance Management Act (PFMA), could potentially make another R35 billion of spending available without following the normal parliamentary processes.

COVID-19 related spending is expected to be funded mainly by reallocations which, unfortunately, may imply further cuts to infrastructure spending. Treasury indicated that it would look to Development Finance Institutions (DFIs) to support infrastructure funding, but governance concerns as well as a lack of ready-to-go projects may curb the extent to which this avenue can be used to reduce the overall funding required from the bond market. The feasibility of continuously funding fiscal deficits of 6% -7% of GDP were already questionable prior to the crisis. The absence of material and credible interventions to markedly improve the economic and fiscal trajectories, have essentially sealed the case for further sovereign credit risk rating downgrades. If government achieves the wage bill savings promised in Budget 2020 – which looks increasingly likely – it would still imply a deficit that exceeds 10% - 12% of GDP given expectations of lower growth and a reduction in government revenue.

Last week, the SA Reserve Bank announced a 1% drop in interest rates. The SARB also announced measures to ease liquidity strains in funding markets. These include supplementary repurchase operations; adjustments to weekly main refinancing operations as required; lowering the Standing Facilities borrowing rate to 200bp below the repo, from 100bp below the repo; and adjusting the rate at which the SARB provides liquidity to banks to the repo rate, from 100bp above the repo rate.

Deeper interest rate cuts (amounting to perhaps another 1% to 2%) may be effected during the remainder of 2020, especially in view of a drop in imports and oil prices and despite the severe weakness in the rand. The balance of these factors could mean that inflation remains contained and could even decline from current levels. Salary increases will almost certainly be kept below the rate of inflation in most sectors.

Over the weekend, one of South Africa’s leading banks has announced that small business clients with a turnover of less than R20 million, could qualify for a 3-month payment holiday, effective 1 April 2020. The bank has also approved a payment holiday for students, and such measures could be emulated by other South African banks.

As suggested by the graphs showing price impacts on certain JSE sectors, real sectors expected to be severely affected, are clearly those focussed on transport, tourism, entertainment, insurance (especially life insurance and medical aid / insurance) as well as banking, durable goods, property, construction, non-essential services and retailing.

With the situation remaining fluid and the time to an effective resolution to the global pandemic being extremely uncertain, it remains almost impossible to model the impact on South Africa’s economy with any degree of confidence. 2020 will almost certainly see GDP growth declining by between 1% and 5%, while 2021 is not expected to be much better.

The rand is expected to remain weak and to perhaps decline even further against the dollar. This would prove to be of some relief for exporters, although global recessionary conditions will have a dramatic impact on export volumes.