Plan to ease the lockdown will be make or break for South Africa’s economy: Nedbank

South Africa’s new R500 billion support package is necessary to alleviate human suffering and mitigate the economic costs of the Covid-19 crisis, but a lot still rides on government’s plan to reopen the economy, says Nedbank.

In a research note published on Wednesday (22 April), the group said that increases to social welfare payments and unemployment benefits will provide additional resources to existing beneficiaries and partially replenish the loss of income to the unemployed.

“Together these measures will ensure that there is at least some, albeit a very modest, level of underlying demand in the economy. It will provide relief, but it is unlikely to provide any boost to the economy for as long as the lockdown is in place,” Nedbank said.

It added that the R200 billion loan guarantee fund is a major positive development as it is soundly targeted and offer strategic assistance, which will reduce the long-term damage to the economy and government finances by helping to ensure that smaller firms and the jobs they sustain survive the crisis.

However, it noted that much of the damage being done is through the continued lockdown.

“The details on the re-opening of the economy are expected on Thursday. This plan will have the most significant economic impact,” Nedbank said.

“The longer the complete lockdown prevails, the more severe and prolonged the damage will be. At this stage, we still expect the economy to contract by around 7% in 2020.”

Who is paying? 

Nedbank’s economists also outlined the budget and debt implications of the announced R500 billion package.

The group noted that the package will increase government spending and reduce government revenue through the tax deferrals and other concessions made.

“Our rough calculations and understanding of the nature of the inventions suggest that government will not need to carry the burden of the full R370 billion left after the reprioritisation of the existing budget,” it said.

“The R200 billion loan guarantee scheme will be financed by the major banks and will therefore not immediately affect government expenditure as the state and the SARB will only be called on to deliver on guarantees if the supported companies fail to recover from the Covid-19 crisis after the lockdown is lifted.”

Nedbank added that the immediate impact on government expenditure will be through much-increased allocations to health care, social grants, special distress relief grant, other direct support measures and perhaps for some of the UIF payments if there are shortfalls.

It noted that President Ramaphosa also announced revenue concessions of around R70 billion.

“It therefore appears as if only around R130 billion will be added to the budget deficit from the second phase of support measures,” Nedbank said.

“Finance Minister Tito Mboweni is expected to announce new, adjusted budget estimates soon, which should provide a better indication of the impact on the government’s bottom line.

“Of course, if the lockdown is extended or the economy fails to recover as the lockdown is lifted, the burden on government will increase exponentially.”

The group said that current market estimates of the likely impact on the budget deficit range around 10% of GDP for 2020/21, from the initially budgeted 6.8%.

Read: South Africa’s R500 billion coronavirus plan in numbers

Must Read

Partner Content

Show comments

Trending Now

Follow Us

Plan to ease the lockdown will be make or break for South Africa’s economy: Nedbank