Finance Minister Tito Mboweni on Wednesday (24 June), warned that the South African economy is expected to contract by 7.2% in 2020, the largest contraction in nearly 90 years.
In his supplementary budget speech on Wednesday (26 June), Mboweni said that Covid‐19 has turned the global economy upside down.
“In the February Budget, we expected that the global economy would expand by 3.3% in 2020. We now expect a global contraction of 5.2% this year. This will bring about the broadest collapse in per capita incomes since 1870,” the finance lead said.
He pointed out that South Africa’s unemployment increased by one percentage point, reaching 30.1% in the first three months of this year, alone, while worse is yet to come in the following months as the effect of the coronavirus epidemic, and resulting lockdown begins to bite.
Inflation will likely register 3% in 2020, Mboweni said. “Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports we have been hit hard by both the collapse in global demand and the restrictions to economic activity,” he said.
Minister Mboweni cited the gospel according to the Apostle Matthew, chapter 7 verses 13 and 14:
‘Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow the road that leads to life, and only a few find it.’
“We are faced, as a nation with a choice between these two gates. Even as South Africa responds to the current health and economic crisis, a fiscal reckoning looms. The public finances are dangerously overstretched.
“The wide gate is a passive country that lets circumstances overwhelm it,” said Mboweni.
“If we remain passive, economic growth will stagnate. Our debt will spiral inexorably upwards and debt‐service costs will crowd out public spending on education and other policy priorities,” he said.
“We already spend as much on debt‐service cost as we do on health in this financial year. Eventually the gains of the democratic era would be lost. The wide gate opens to a path of bankruptcy.”
He said that a sovereign debt crisis is when a country can no longer pay back the interest or principal on its borrowings. “We are still some way from that. But if we do not act now, we will shortly get there,” he said optimistically.
The minister said that the results are devastating. “Interest rates sky‐rocket. Spending has to stop. Inflation takes hold and people grow much poorer. This is what happened to Germany in the 1920s, to Argentina and to Zimbabwe in the early 2000s, and to Greece in the past few years.”
“Argentina had its ships attached. Greek civil servants and pensioners had their salaries and pensions slashed.
“In short – it is doom and despair,” he said.
“We have been there before: in its closing days, the Apartheid government had to declare a debt standstill.”
The narrow gate on the other hand opens to a path of prosperity, Mboweni said.
“Through this gate, we reduce our reliance on borrowing. We feed the hungry. We look after the sick. We educate our people. We build for the future. We spend with wisdom, and we jail those who loot.
“The narrow gate is an active approach – a nation that takes active steps to rapidly stabilise debt and grow the economy. By doing this we will create jobs, reduce the cost of doing business and build a competitive economy.”