Current projections from the South African Reserve Bank (SARB) are that the South African economy will get back to pre-Covid levels by 2022.
However, as the country enters a third wave of infections and parts of the economy are forced to limit activity, this projection might prove to be optimistic.
This was the sentiment of Dr Rashaad Kassim, deputy governor of the SARB, who was speaking at the recent Nedgroup Investments annual treasurer’s conference.
“Our projections for 2021 is that our economy will recover about 4%, which is not yet at pre-Covid levels. We only expect that to happen in 2022. Normalisation is contingent on the pace at which we think the economy will recover, and we might be forced to reassess this view at out next meeting,” he said.
Kassim said that the long-term nature of the pandemic has taken everyone by surprise and given cause to expect some permanent restructuring of the economy.
“This pandemic has persisted longer than anyone initially thought it would. We know there will be permanent income loss in some parts of the economy, while other areas are thriving. The challenge for us is to figure out the extent to which are we seeing this reallocation.”’
The biggest risk to South Africa, much like many other emerging markets is the tightening up of financial conditions, said Kassim.
“What worries us is the extent to which Covid exacerbates many of the metrics we were already worried about, such as public debt and volatility in our financial markets.
“We are concerned about the extent to which the yield curves will go up, making it more expensive to borrow. We are monitoring this very closely to assess the risk to us if there are capital outflows and if we see financial conditions tightening,” said Kassim.
In spite of this, Kassim said South Africa is still seen as a reasonable investment for several reasons, including bank resilience, a deep financial sector and well-functioning institutions.
He also said that in the case of outflows, the economy falls back on less vulnerable, local investment.
“If some of our ownership of bonds was taken over by local pension funds, insurers and banks, it makes you less vulnerable to an outflow of non-resident investments in the country.
“When non-resident investments flow out of the country, many South African residents who have investments abroad also bring their money back.”
The housing market also remains vulnerable – and there might not be much more that interest rates can do to create buoyancy, said Kassim.
“Mortgage extensions from the banks took a massive dive in March 2020, but we’ve seen a fairly good recovery in the housing market and low-interest rates must play a critical role here.
“However, low-interest rates must be juxtaposed with the loss of income due to retrenchments and other income so we may reach a point where, despite low-interest rates, income losses have been so significant that interest rates have played some role in reviving the housing market, although it may not be sustainable.”
Given the third wave of infections now sweeping the country, “the housing market is not out of the woods,” he said.