Coronavirus is a double-blow to South Africa’s economy

The impact of the Covid-19 coronavirus outbreak on South Africa is a double-blow to an economy that is already down from a technical recession – and that’s before counting the risks of the virus spreading locally.

Speaking to CNBC Africa, PwC economist Christie Viljoen said that the economic impact of the virus on South Africa is difficult to place, but will almost certainly be felt, particularly the effects of the virus in China.

According to the economist, the impact of the coronavirus on the Chinese economy is what would feed on to the rest of the world, including South Africa. Being the biggest trade partner, the impact on the Chinese economy will hit South Africa particularly hard.

The current Chinese economic growth outlook for 2020 of 6% – could be cut to 5%, or lower. In a best-case scenario (rapid containment) the country would suffer a o.2 percentage point drop – but some Chinese research groups are already pencilling in a decline to 4.8%.

“For every percent that the Chinese economy cut, the impact on South Africa is a decline of around 0.2 percentage points,” Viljoen said. This would take PwC’s projections for the year from 0.8% to 0.6%.

“This is is just impact from import/export dynamics with China,” he said, adding that this isn’t taking into account the effects of a potential worsening local outbreak, now that the virus has landed in the country.

From the fiscal side, there’s very little we can do, he noted, as the country does not have the funds available for a massive stimulus package, as seen rolling out in other regions.

However, on the Resereve Bank side there is room to cut interest rates – but as governor Lesetja Kganyago has already noted, this is not the ultimate solution for the economy.

“As such we don’t expect a sudden or a big cut. Should he (Kganyago) have already cut by now? It’s a good question. But it would be unorthodox for the Reserve Bank’s Monteary Policy Committee to meet more, or sooner than they already have – but there is room for a cut,” Viljoen said.

The MPC is expected to meet again on 17 to 19 March.

According to PwC, many of South Africa’s industries will see an adverse impact from Covid-19, including mobile operators, automotive manufacturers, as well as hospitality and retail establishments.

Three out of four Chinese tourists to South Africa undertake personal shopping activities, and while the size of the potential decline in Chinese arrivals in South Africa is hard to gauge at present, PwC estimated a potential loss of at least R200 million in Chinese tourist spending.

This suggests around 1,000 jobs in the local tourism and hospitality industry could be on the line.

Double blow to the economy

PwC’s alarming assessment comes on the back of news that South Africa has entered into its second technical recession in as many years, following a shock GDP decline in the fourth quarter of 2019.

The GDP knock follows a restated decline of 0.8% in the third quarter, taking South Africa’s overall GDP number for 2019 to just 0.2%.

Before the spread of the coronavirus, expectations for South Africa’s GDP growth in 2020 were already low, largely thanks to power shortages, muted consumer spending and a host of socio-political problems.

National Treasury’s expectations on growth have been the most optimistic so far – and even then projections have been sub-1% at 0.9%. Some of the most pessimistic projections have been as low as 0.3%.

Taking into account just the import/export knock forecast by Viljoen, this would point to flat growth for South Africa’s economy in 2020 at just 0.1%. This could get worse if load shedding persists, or the economy takes other knocks.

The bright side

However, other economists have noted that the reverse is also true. If the virus is contained, the bounce-back in equity markets could be substantial, analysts have said.

Markets like South Korea, the US and Australia have also floated stimulus packages to soften the impact of the outbreak on global markets. This follows $50 billion put forward by the International Monetary Fund this week to the same effect.

Investors have been holding back and taking a wait and see approach to equities as uncertainty persists around the impact of the virus in certain markets, said Ed Brooke of Australian wealth management firm, Escala Partners.

“If the coronavirus becomes contained or you get some sort of drug that will help, the bounce-back will be quite substantial. With cash rates close to zero around the world, investors won’t be sitting out for long, and with more stimulus coming through, there is an upside story here as well,” he said.

Hao Zhou, senior Emerging Markets economist at Commerzbank, said that following a 10% to 20% drop in trade out of China, the country is slowly getting back on track, and that things should show improvement by the end of April.

With the impact of the virus being felt globally, the president Cyril Ramaphosa reiterated that South Africans must brace themselves.

“It will have a huge impact on a number of things like travel. It will have a negative impact on the economy, which as we all know is in a precarious [state],” said Ramaphosa.


Read: South African companies can test employees for the Covid-19 coronavirus – here’s what you need to know

Must Read

Partner Content

Show comments

Trending Now

Follow Us

Coronavirus is a double-blow to South Africa’s economy