Lockdown and COVID-19 in South Africa: Economic impact underestimated

After more than a month of some of the strictest lockdown measures imposed by any country, the jury is still out on whether we have seen the worst of the coronavirus epidemic, or whether the worst effects of the disease are still to come for South Africans. But what is certain, is that the economic impact of the government measures imposed thus far and still envisaged for the near future, will be quite severe.

Lockdown impact severely affecting businesses

On 21 April, Stats SA published the results of a survey of 707 businesses [1], attempting to measure their implemented and expected future actions due to the lockdown, as well as their experience thus far and foreseen impact of the ceasing of most sales, services, production and international trade. The following is a summary of the findings:

85.4% of responding businesses reported turnover below the normal range
46.4% indicated temporary closure or paused trading activity
50.4% expected their workforce size to stay the same in the two weeks after the survey
36.8% reported that their workforce size is expected to decrease
28.3% indicated that they decreased working hours
19.6% reported staff being laid-off in the short-term
19.1% indicated that prices of materials, goods or services purchased increased more than normal
23.8% indicated a decrease in access to financial resources, while 52.6% indicated access to financial resources remaining the same
38.2% of businesses applying for financial assistance reported that they would use government relief schemes
30.6% indicated they can survive less than a month without any turnover, while 54% can survive between 1 and 3 months only
46.3% of the workforce were able to meet business demands, and 43% of the workforce were not able to meet business demands (the rest reported being unsure)

Three-phase approach

At the onset of the lockdown measures, government said that they will be following a three-phase approach to tackle the disease and protect the economy. (These phases are not to be confused with the five stages of lockdown announced by government recently.)

Phase I started in mid-March when the pandemic was declared a national disaster and when government introduced a range of support measures including tax relief, the release of the disaster relief funds, emergency procurement, wage support through the Unemployment Insurance Fund (UIF) and funding for small businesses in distress.

Phase II is aimed at stabilising the economy and countering the sharp falloff in supply and demand. It essentially consists of a R500 billion, or about 10% of GDP, social relief and economic support package.

Phase III, which is still to come, will be aimed at facilitating the economy’s recovery from the COVID-19 shock. In this phase government will attempt to stimulate demand and supply through infrastructure investment, the speedy implementation of economic reforms and ‘other’ measures to promote transformation and inclusive growth.

Phase II support package: Who benefits and how will it be financed

On Tuesday, 20 April, President Ramaphosa announced a R500 billion package (around 10% of 2019’s GDP) to further fund the coronavirus fight and to stabilise and support the economy [2]. The amount will consist mostly of aid to unemployed workers and small businesses, additional job creation, temporary increases in social grant pay-outs, hunger relief, and tax relief measures. The biggest part of the support package (R200bn) will be committed to a loan guarantee scheme for banks and eligible firms and their employees.

The detailed programme is summarised in table 1.

Funding the R500 billion

Details about the exact way in which the R500bn is to be financed, remain sparse. Finance minister Tito Mboweni explained in a briefing on 24 April what is envisaged and also announced that a new Budget will be drafted within the next few days [3]:

The R200 billion loan guarantee scheme will be financed by the major banks and will therefore not immediately affect government expenditure as the state and the SARB will only be called on to deliver on guarantees if the supported companies fail to recover from the COVID-19 crisis after the lockdown is lifted.
R130 billion will come from the reprioritisation of the current budget. Theoretically, these funds will not be added to the borrowing requirement, fiscal deficit or state debt. However, it is difficult to envisage from which departments’ budgets these funds will be re-allocated. Assuming that public sector wages will be protected, around 14% of all departments will need to be cut, apart from health and social services. Many public sector employees will need to be retrenched, but organised labour will undoubtedly not allow this to happen.
The remaining R170 billion will be financed through both local and global sources. This amount will be additional debt. According to Mr Mboweni, the following amounts could be financed relatively quickly:
- R1bn ($60 million) from the World Bank for Covid-19 related programmes
- R76bn ($4.2bn) from the International Monetary Fund’s (IMF’s) Rapid Financing Instrument
- R18bn (S1bn) from the BRICS’s New Development Bank

The above amounts bring the total “secured” amount to around R95bn. The remaining R75bn will also need to be obtained from the IMF or World Bank (but will have “strings attached”, such as the scrapping of certain economic policies and the implementation of others) or via normal bond financing (weekly auctions).

The minster also placed a number on the monetary stimulus that is already being provided by the SA Reserve Bank. This amounts to an estimated R300bn and includes lower interest rates; increased liquidity provision, specifically offering repurchase agreements of maturities of up to 12 months as opposed to the usual 7 days; and government bond purchases.

Budget & debt implications

The package will increase government spending and reduce government revenue through the tax deferrals and other concessions made. If only the R75bn of the above mentioned amount is added to the deficit, the deficit/GDP ratio will increase to around 8.5% of GDP (from 6.8% currently projected). If revenue is adjusted, the deficit could increase to more than 10% of GDP. (In calendar 2018, this ratio amounted to 4%.) The R170bn worth of additional borrowing, will also push the National Government debt-to-GDP ratio to around 85% at the end of 2020, from the 61% recorded at the end of 2019 and the 74% projected without the stimulus package. The possibility of a debt trap, where more and more funds need to be borrowed just to finance debt repayments and interest, indeed start to loom large.

Disease impact vs economic impact

Whether the R500bn stimulus plan will be enough, still depends entirely on how soon the lockdown is ended. Hopes that the lockdown will be ended in one fell swoop at the beginning of May, proved to be quite naïve. Instead, an extremely cautious and somewhat complicated five-stage lockdown plan was announced. Various stages of lockdown will need to be endured for weeks, if not months. These between stages, provinces and even districts. Consequently, many sectors, businesses, workers and ordinary citizens may at different times not know which activities and actions are allowed or not.

The implementation of a curfew as from 1 May, indicates that more, and not necessarily less strict measures may be looming. Serious concerns have also been expressed at some provincial governments’ decisions to disallow self-quarantine in cases where COVID-19 is diagnosed and to instead force people into government approved quarantine camps.

If economic production and trade cannot return to normal as soon as possible, an economic injection of at least double the R500bn package will be needed to offset the losses which may occur as a result of an extended lockdown period. Not only will people be finding it progressively difficult to stave off hunger because of being left jobless or unable to return to work, shortages of some items will increasingly be reported. In addition, anecdotal evidence suggests that food and “other essential” product prices are rising at a much faster pace than currently reported by Stats SA. It appears increasingly possible that food production, for one, will not be able to continue at a pace and cost of production which are required to feed the population. Government may well need another strategy to deal with people succumbing to hunger.

At present, the government appears to pin their hopes mainly on a lockdown / curfew strategy to contain the spread of the virus. A study by health economist professor Alex van den Heever [4], has extensively researched the effectiveness of relying mainly on lockdown measures and has concluded that 193 days (nearly 28 weeks or six months) of lockdown will be required to achieve this goal. Assuming a lockdown period of 196 days or 28 weeks and allowing for a slow return to normality, South Africa could see as much as 18% (roughly R1 trillion) of GDP being lost in an our attempt to contain the disease (see table 2).

Projections and time frames associated with the disease, vary substantially and actual impacts can only be measured with certainty after the event. At this stage, lockdowns have had varying rates of success in different countries. Countries with relatively strict lockdown rules imposed, such as the UK, Spain and Italy, had abnormally high numbers of deaths, while Sweden, who opted not to impose a lockdown, had no worse than average numbers of infections rates or deaths [5].

Up to now, projections of hundreds of thousands of South Africans potentially needing hospitalisation and tens of thousands of people succumbing to the disease, have fortunately not materialised [6]. To what extent this can be attributed to the lockdown measures, is a matter of debate. But it does appear as though the global curve of infections is flattening [7]. There is a possibility that the the disease’s still looming impact in South Africa may still be overestimated, while the economic impact of the lockdown measures could be under-estimated.

Finally, although social distancing and restrictions of large gatherings appear to be logical strategies which may need to be retained for some time, there is no doubt that a gradual re-opening of business while retaining most lockdown measures, especially the delineation of essential / non-essential goods and services, will carry a very high cost in terms of lost production, sales, wages and government revenue. Government is, therefore, facing an increasingly difficult balancing act between the appropriate health and economic responses to the pandemic.

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