The Covid-19 pandemic has created a much harsher global backdrop for South Africa, which faces an economic calamity post lockdown, notes Absa in a new research document.
In a global context of severely weakened global activity, collapsed commodity prices and heightened risk aversion will greatly challenge the country, even before accounting for the domestic costs of fighting Covid-19, it said.
A global recession is now likely in 2020, with only a slow recovery thereafter. And with South Africa’s massive budget deficit, a world of sharply less capital inflows will be a big blow, the financial services group said.
Surprisingly, Absa noted, South Africa so far appears to be doing ‘relatively well’ in containing the virus, with no exponential growth in new infections. The country adopted aggressive measures to battle Covid-19 early while widespread vaccination against tuberculosis may also to prove to be a plus.
Recent scientific evidence suggests that near-universal childhood inoculation against tuberculosis may be serving to lessen the incidence and overall mortality rate of the disease.
South Africa’s relatively young population may also help, Absa said, with StatSA’s data showing that nearly 72% of the population is under 40 years old while only 9% is above the age of 60.
“The available data seem to suggest that South Africa’s incidence curve may be flatter than for many other countries, although insufficient testing to date warrants caution about this conclusion,
especially since Covid-19 cases have been confirmed in at least two of South Africa’s townships, and a significant proportion of people who contract Covid-19 may be asymptomatic.
“The risk that South Africa’s apparent early success against Covid-19 could collapse when social distancing is lifted explains why the government announced a two-week extension of the lockdown beyond its original termination date of 16 April, despite its big economic and social costs,” Absa said.
Negatively, large parts of the population are relatively impoverished, living in close proximity, and many HIV+ people are not receiving ARV treatment.
“New infection rates have been surprisingly subdued but it is hard to know how much of this is due to the early adoption of very draconian social distancing measures versus other more sustainable factors,” Absa said.
It pointed out that some parts of the economy such as mining have been granted the ability to return to work sooner, while others might still be restricted even after the full lockdown is lifted.
Lockdown will likely be relaxed only gradually, which spells bad news for the economy, and employment.
“Moreover, we believe the hit to growth from the lockdown will not scale linearly into its length or intensity, because it will generate negative repercussions with multiplier effects, as economic weakness feeds on itself,” Absa said.
It said that the negative economic consequences of Covid-19 will continue to manifest long after the virus is brought under control.
“Thus, after the lockdown-related growth seizure in Q2, while some bounce in real GDP is likely in Q3, there will likely be much permanent damage to the productive capacity of the economy in the form of firm closures, worker layoffs, impaired balance sheets, shattered confidence and so on,” Absa said.
The group forecasts that GDP will contract by 6.4% in 2020, “but we caution that this forecast, like all others right now, has more than the usual degree of uncertainty and downside risk”.
It pointed out that its forecast is very close to the SA Reserve Bank’s forecast that GDP would contract 6.1% this year, and the IMF’s projection of a 5.8% contraction.
The unmatched economic contraction will ravage already fragile public finances.
“Critical spending needs that cannot be fully financed by reallocation from within the existing budget envelope will manifest, and tax revenues will crater.
“We expect a double-digit main budget deficit of 12.5% of GDP this year, and public debt is set to soar to 76.4% of GDP by the end of FY20/21,” Absa said.
The finance minister has said that South Africa will look to secure some multilateral funding, the lender pointed out.
Absa said that its baseline forecasts assume that although there will be some layoffs, most workers in mines and factories will retain their jobs, albeit perhaps with reduced
shifts and reduced pay for a while.
Meanwhile, many workers in some service industries will be able to either work from home for a while, or adjust working patterns.
However, firms that go bankrupt will, by definition, shed labour, it said.
In the tourism sector, the majority of the 681,000 workers employed before Covid-19 will likely face layoffs, and many of the nearly 3 million workers in the informal sector could struggle to keep their ‘jobs’ if household incomes elsewhere, particularly among the poor, slump.
In the 2009 global financial crisis, about 500,000 workers lost their jobs from the peak to trough of private sector employment.
However, this came after a longer period of robust growth during which firms added workers to their payrolls. By contrast, this time around, firms have been wringing excess workers from their payrolls over the past half-decade, Absa said.
“Given the political and moral pressure on employers to retain their workforce during this crisis, we believe that at least some of the adjustment will come via pay restraint.”
More credit rating downgrades likely loom, given negative outlooks from all three rating agencies, Absa said.
Once the crisis recedes, South Africa needs to lower its huge budget deficit and implement growth-boosting reforms to avoid further deterioration, the financial services firm said.
“South Africa will need to wrestle its enormous budget deficit down, and implement a raft of growth-boosting structural reforms to avoid further deterioration, and it will have to do so
from a much weaker starting point,” Absa said.
It noted that the current pandemic is a big distraction from the reform agenda, but there are signs that the government intends to ‘not let a good crisis go to waste’, essentially using the urgency of the crisis to implement policies that were previously impossible.
“For example, the government has declined to provide any further bailout funding for loss-making South African Airways and SA Express, which essentially means that they will be liquidated, in our view,” Absa said.
It pointed to four reforms it sees as particularly critical over the next year to lifting business confidence, boosting growth and avoiding further credit rating downgrades.
The first is securing electricity supply in a liberalised market. “The government is now awaiting concurrence from the regulator on its plans,” Absa said.
The second is securing regulatory certainty in the key mining sector, in part via an agreement on the ‘once empowered, always empowered’ standoff that is preventing agreement on the Mining Charter.
The third is opening up the visa regime for skilled foreigners once the travel ban is lifted. The fourth is the auction of the broadband spectrum, Absa said.
The Covid-19 pandemic could also profoundly shift the thinking of both the government and the private sector in a number of important policy areas, including especially National Health
Insurance, it said.
“Still, it remains exceptionally difficult to see how this scheme, despite its moral and social merits, can be financed. So far, the crisis has not sparked any evolution in the governing
alliance’s thinking about labour market shibboleths, but reformers in the ANC must understand that increased labour market flexibility is key to job creation.
“Perhaps, moves towards this could be offset by a fresh look at basic universal income approach to social welfare, especially if firms lay off lots of workers and growth is slow to recover.
“The proposal to top up social grants for the duration of the crisis could mark a step in this direction,” Absa said.