These economies will be hardest hit by the coronavirus – including South Africa

JP Morgan Chase & Company has outlined how the world’s economies will be impacted by the coronavirus, with South Africa forecast as one of the five countries which will be hardest hit.

In a weekly research note, the group forecast that the country’s economy will contract by 7% this year  – well above some of the estimates which have been provided by local analysts and Treasury.

The group cited the fact that more than half of the country’s economy has closed due to the mandatory 21-day lockdown, with GDP expected to be slashed in the short term.

However,  the group noted that because South Africa was already in a precarious position before the coronavirus outbreak it was only forecast to grow 0.7% this year, meaning the total decline is ‘only’ 7.7%.

The other country’s which JP Morgan forecasts will be hit hardest by the coronavirus include:

• Mexico faces a 7% GDP contraction after being forecast to grow 1.5%;
• New Zealand faces a 4.8% contraction after being forecast to grow by 2.4%;
• The US faces a 5.3% after being forecast to grow by 1.7%;
• Thailand faces a 3.3% contraction after being forecast to grow by 2.8%.

Downgrade

JP Morgan also noted that South Africa faces an uphill battle after being downgraded to junk status by ratings agency Moody’s, making it harder and more expensive for the government to borrow just as it needs to spend heavily to battle the coronavirus crisis.

These concerns were echoed by Jeff Gable, head of research at Absa Group, who noted that for the first time since South Africa’s return to global markets in 1994, the country is no longer rated investment grade by any of the large global credit rating agencies.

“South Africa’s credit rating has not only symbolic importance, but also is an important driver of the price of debt financing for the government curve and beyond,” he said.

“Markets have focused on the potential for a downgrade from Moody’s as South Africa deterioration to a speculative-grade rating (or “junk” in common parlance) will trigger the exit of the government’s rand-denominated bonds from several major global bond indices, including the FTSE Russell World Global Bond Index (WGBI) and the World Inflation-linked Securities Index (WILSI).”

That exit is now expected to take place at the end of April,  and will be effective early May. Absa’s FIC Research team estimates that this is likely to trigger $4-8 billion (R72 – R144 billion) in forced selling from global funds that passively track these indices.

That all agencies currently hold the country’s credit rating under negative outlook suggests that they do not see significant improvement likely soon, said Gable.

“And it will be that significant improvement, if delivered, that will ultimately determine whether South Africa will be able to plot of a difficult return to investment grade in the years ahead, move sideways at current levels, or slide further away from investment grade,” he said.

“The answers will be found here in South Africa, rather than by looking at the examples of other Emerging Markets and the specifics of their economies, policy choices and politics.”

Gable said it is not the job of credit rating agencies to lecture governments, to try to diminish the democratic process, or even to try to influence government policy, but rather to help investors understand the creditworthiness of an issuer.

“With that in mind, it is hard to argue that South Africa hasn’t witnessed a steep deterioration in fundamentals, in part by our own ability to act over the last decade and in part due to the new risks due to the global virus,” he said.

“And so, it is the agencies’ duty to reflect that in their ratings. Similarly, it is up to South Africa, and not the credit rating agencies, as to which direction that country would like to take going forward. ”

Read: Treasury sees Moody’s junk rating as a cue to fix the economy