A coronavirus ‘double-hit’ – and what it could mean for South Africa
The Organisation for Economic Co-operation and Development (OECD) has published a new economic survey focusing on South African and the impact of the coronavirus pandemic.
Unsurprisingly, the group noted that the pandemic and ensuing lockdown have triggered a sharp drop in activity.
“The 2020 recession follows almost a decade of modest growth. Persistent electricity shortages, rising government debt and policy uncertainty will continue to hold back investment and underscore low growth.
“The economy is set to recover only progressively from the coronavirus recession as sectors reopen.”
The OECD added that a recovery could differ wildly depending on whether a second coronavirus wave presents itself later in the year.
It specifically looked at one scenario in which a second outbreak occurs in all economies towards the end of the year – a double-hit – and an alternative scenario where the second outbreak is avoided – single-hit.
“In the double-hit scenario, a new outbreak affecting South Africa and its trading partner countries will curtail exports, deepening the recession to -8.2% in 2020 and limiting the recovery in 2021, with GDP growth at 0.6%.
“In the single-hit scenario, where a second wave of the virus can be avoided, economic activity will fall by 7.5% in 2020 before picking up progressively with GDP growth of 2.5% in 2021,” it said.
The OECD said that the government’s relief plan will mitigate the fall in household consumption, but investment, which has been declining over the past two years, will decline to a record low level.
“The depreciation of the rand, driven by deteriorating fiscal accounts, will not boost exports as commodity demand remains weak, though prices of some commodities (gold, platinum) are high in the single-hit scenario.
“High production costs will continue to weigh on economic activity.”
The group also cautioned that existing domestic and global risks continue to weigh on South Africa’s economic outlook.
Domestic near-term risks to growth include load shedding by Eskom and higher-than-expected electricity prices, which could derail the recovery.
“By contrast, improvement of business confidence and a faster recovery in emerging market countries would have growth spillovers for South Africa, including through higher demand and prices for commodity exports,” the OECD said.
Fiscal accounts
The OECD said that the coronavirus crisis follows a sharp deterioration in fiscal accounts over the past three years, with the government deficit projected to reach 15% of GDP in 2020.
Public debt has been increasing in the last decade and is projected to exceed 80% of GDP by 2020, it said.
It warned that in the absence of consolidation, the debt level will exceed 100% of GDP in 2022, raising sustainability risks in a context of low growth and high government borrowing rates.
“The fiscal strategy has to sequentially cope, in the short-run, with the impact of the coronavirus and, in the medium term, implement a bold consolidation to restore debt in a sustainable path while sparing potential growth,” it said.
Key to this is addressing government employee compensation, which the OECD said is ‘large’.
“At 12% of GDP, the government wage bill is high. Rising wages are driving wage bill increases rather than employment. Wage negotiations have systematically granted above-inflation increases.”
It added that when compared to OECD and emerging economies, the remuneration level of civil servants is relatively high.
While the government has announced its intention to reduce the wage bill, the group said it could consider indexing public sector wages below inflation for three years.
It said that the government will also have to deal with the under-performance of its SOEs.
“Government exposure to state-owned enterprises (SOEs) is high and represents a significant risk to debt sustainability and public finances.
“The underperformance of SOEs is widespread due to mismanagement, corruption issues, over-staffing and an uncontrolled wage bill.
“South Africa needs to establish an effective governance framework for SOEs that clearly sets company-specific goals in terms of profitability, capital structure and non-financial objectives.”
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