A ‘deep recession’ on the way for South Africa, but there is some good news says economist

Before president Cyril Ramaphosa announced a nation-wide lockdown to curb the spread of the coronavirus, estimates from the South African Reserve Bank showed that the country’s economy was expected to decline by 0.2% in 2020. The situation is now far worse, economists warn.

Speaking to CNBC Africa, FNB senior economist Siphamandla Mkhwanazi, said that the country’s three-week lockdown will deliver a massive blow to the economy, shooting far beyond the -0.2% estimates from the SARB.

“(A decline of) 0.2% is too small, considering the loss in activity that we are likely to see over the next 21 days,” he said. “If you just look at the consumer goods that are restricted – those that meet the criteria of non-essential – they for around half of what South African consumers spend on.”

“If you average that around 21 days, you get to about 2% of GDP. Just the restriction on those goods will lead to a contraction of 2% on GDP in 2020,” he said.

Mkhwanazi added that this is just one segment. “We haven’t even accounted for the disruptions on investment activity or the disruptions on import and export.”

Adding the impact on investment activity would see another 1 percentage point added to the decline – meaning we’re already at a 3% decline, which is just expected to grow as more sectors are affected.

Notably, this is the effect of a ‘best case scenario’ lockdown – assuming it will come to an end after three weeks and not extended. The longer the lockdown is in effect, the harder the economy will be hit.

“We’re expecting a much deeper decline in GDP in 2020 than in 2008, during the great economic recession,” Mkhwanazi said.

The SARB has also historically been more optimistic in its GDP forecasts. Before the lockdown announcement, independent economists and analysts saw South Africa’s GDP declining by as much as 3%, versus the Reserve Bank’s -0.2% estimate.

Some investors who hold an increasingly bearish view, see South Africa’s GDP declining by as much as 10% in 2020 as a result of the lockdown.

Covid-19 an economy killer

Old Mutual Investment Group said that the economic repercussions of the Covid-19 coronavirus in the short term will be costly.

Johann Els, chief economist at Old Mutual Investment Group, said local measures to contain the virus will add to an already weak economy and negative global impact. Els forecasts that GDP will contract by 2% for 2020, that inflation will edge 3.5% and that we will see a budget deficit of 10%.

“While we hope to come out more strongly than this, the reality is a stark one in the short term. The efforts so far taken by the South African government have to be applauded, but we need to face up to the fact that there will be severe economic effects to the downside in the short term,” said Els.

However, thanks to a potential stabilisation of the virus, policy support and a low oil price, a “V-shaped” recovery is expected to follow the deep recession of the first half of the year. “The economic impact is going to be severe but short-lived,” said Els.

The economist is pencilling in a global growth rate of 4.5% in 2021 from -1.2% this year, while South Africa is expected to reach 1.8% GDP growth in 2021, with the potential to hit 2% over the medium term.

“It is still not nearly enough to create the jobs and stimulate the higher levels of investment we need, but several green shoots are emerging. We have a president showing he is willing to make tough decisions and is being supported by a committed cabinet.”

“Fixing the state and broken SOEs will continue, as will fighting corruption. Low inflation will help consumers, as will further interest rate cuts. The foundations are being laid for better growth,” said Els.

Moody’s downgrade

South Africa’s woes will be compounded by an expected downgrade from ratings firm Moody’s, due to release its findings before the end of the month.

According to Mkhwanazi, however, the threat of a rating downgrade has been hovering over South Africa’s head for a long time.

“Even before this (lockdown), a downgrade from Moody’s has been inevitable in a way. We were already ‘likely’ to see it November 2020, following the ‘okay’ budget in February.

“Now if you factor in all these new developments, including the intensified electricity constraints, it just means it could happen sooner – I wouldn’t be surprised if we even see that move by next week,” he said.

Mkhwanazi said that given what the country is experiencing right now, a ratings downgrade wouldn’t have much bearing.

“Markets would more than likely disregard that move and focus more on the shutdown. The impact may only be felt after the dust has settled,” he said.

Old Mutual Investment Group portfolio manager John Orford said there will be opportunities for investors as the “fear factor” recedes. “Despite the imminent rating downgrade to junk by Moody’s, it’s important to point out that the market has already priced this in. We continue to see local bond return at an impressive 5.5% over the long term despite being labelled “junk,” he said.

“Global bonds are likely to offer ‘less reward ’ risk of only -1.5% over the long term, while local fixed income investors could see much higher real returns as rates come down. He says local interest rates still can move “much lower”, while he expects lower oil prices to usher in significant benefits for investors and the real economy.”

Local equities can be expected to outperform their global counterparts, with an expected long-term return of 7%, versus 5.5% globally.

“While we still recommend some diversification, we do see exceptional relative value in local equities and bonds. I expect 2021 to be a better year, with equities offering their best returns since the 2008 global financial crisis,” Orford said.

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