April data shows how deep Covid-19 has cut into South Africa’s economy

 ·10 May 2020

April followed the same script as March, introducing one scene after the other that market participants have either never seen before, or not in their lifetime, at least, says Gielie de Swardt, head of Retail Distribution at Sanlam Investments.

For the first time since the end of the Mao era in the 1970s, China’s economy contracted on a full-year basis. China was the first country to shut down parts of its economy due to Covid-19 and, as a result, its GDP shrank 6.8% from a year ago.

“The spread of the disease around the world and the sharp drop in global demand for its goods have brought it to a place where it is now reliant on domestic demand for recovery,” said De Swardt.

EU and US economies also contracting fast

Sanlam Investments noted that data released at the end of April showed that the EU had shrunk by 3.5% and the US by 4.8% in the first quarter of 2020.

The US contraction is the largest drop since 2008. Also, the total number of people unemployed in Europe’s biggest economy, Germany, soared 13.2% in April. In the US, an unprecedented number of Americans filed for unemployment benefits, sending the six-week total above 30 million since Covid-19 began to shutter businesses across the country.

Gold keeps climbing

On 20April, the price for May oil contracts broke every low for oil prices since 1946. The West Texas Intermediate (WTI) futures exchange allowed price to go below zero, on concerns over a momentous build-up of supplies.

Two days later, Brent futures for June delivery lost 15% on the day to trade near $16 a barrel. In contrast, still considered a safe haven, even though Covid-19 is turning all other markets upside-down, gold traded above $1,720 per ounce mid-April, translating to over R1 million for a kilogram of gold, Sanlam Investments said.

SA companies cut wages

One of the first SA businesses to announce unconventional measures during April to contain costs was property giant Pam Golding. Effective from 1 April it cut all salaries by 30% and approached its pension fund administrator for relief, asking to suspend all pension fund contributions other than risk premiums, De Swardt said.

Various other businesses announced that their top management will take a substantial salary cut for the next few months. One in five SA businesses surveyed by the new Statistics SA business impact survey have laid off staff due to the impact of the coronavirus pandemic. The survey was based on the responses of 707 business across all sectors of the SA economy.

SARB cuts repo another 100bps

The SA Reserve Bank (SARB) unexpectedly cut the repo rate by 100 basis points, taking SA’s repo rate to 4.25% – its lowest level since 1973. This was the second major cut in less than a month, after the bank cut the rate by one percentage point in mid-March.

This bore good news for those repaying debt, as prime dropped from 8.75% to 7.75%, the analyst said.

Disturbingly, though, the SARB forecast that the SA economy will contract by 6.1% in 2020, said De Swardt.

Edcon files for business rescue

Businesses with a significant amount of debt and those that had been struggling before the nationwide lockdown, had to take emergency steps during the month of April. For example, Edcon, which owns well-known household brands Edgars and Jet, started to prepare for voluntary business rescue proceedings, said Sanlam Investments.

The company announced that about R2 billion in sales had been lost up to the date of the announcement due to the nationwide lockdown, consuming the group’s cash pile.

Slow opening of the SA economy allowed

During April several amendments to South Africa’s Covid-19 national lockdown rules, which will see more businesses allowed to operate, were announced during a Covid-19 National Command Council briefing, noted Sanlam Investments.

“The industries in which staff are allowed to return to the economy in stages include mining, oil refineries, ports, DIY stores, certain call centres, ‘essential service’ repair and maintenance providers such as electricians and plumbers, financial services and certain professional services.

“It was also announced that the Deeds Office, which had been closed during Level 5 of the lockdown, would re-open in May – good news for the property market,” said De Swardt.

SA announces R500 billion economic stimulus and social aid

Extraordinary challenges call for extraordinary fiscal steps, he said. Pulling out all the stops, president Cyril Ramaphosa announced a R500 billion stimulus package, to mitigate against the social and economic risks the country currently faces, among these a deep recession.

The stimulus package amounts to 10% of the country’s gross domestic product – extraordinary relative to the size of the economy.

The support package will be funded by reprioritising around R130 billion from the National Treasury’s current budget, while the remaining R370 billion needs to be sourced mainly from the International Monetary Fund, the Brics New Development Bank and the African Development Bank.

Read: A shocking picture of what it’s like to be a small business owner in South Africa right now

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