South Africa is facing an ‘A-grade crisis’ as it grapples with the impact of the coronavirus and its own weak economy, says chief economist at the Efficient Group, Dawie Roodt.
Roodt said that he expects growth of approximately -1.8% or even worse in 2020, while the weaker economic expansion will result in several economic variables deteriorating – including fiscal debt and current account deficit ratios relative to GDP.
“An obvious and likely policy reaction is a cut in short-term interest rates. In fact, we believe that the SARB (South African Reserve Bank) has room to cut rates by 50 basis points or even as much as a full percentage point,” he said.
“We also do not anticipate a significant negative reaction, like a sharp fall in the exchange rate, due to such a large reduction in interest rates.”
The fact that monetary policy is available to support the economy during these difficult times is testament to the sensible way monetary policy was conducted in the past, Roodt said.
“Despite calls from all and sundry, the SARB kept monetary policy relatively tight. And now that we need monetary policy support, the SARB has dry ammunition available.
“Unfortunately, monetary policy support is unlikely to provide much support to the economy, although some peripheral benefits are likely.”
Roodt said that what South Africa really needs now is significant fiscal policy support.
“We need the state to cut taxes and even increase spending to support the economy. Unfortunately, this option is not available,” he said.
“The reason for this is as clear: For years the fiscal accounts have been mismanaged. State debt has reached unsustainable levels and even before the coronavirus, the deficit was budgeted to reach nearly 7% of GDP.
“Now, with a weaker GDP, even lower taxes and more pressure on spending, a significantly higher fiscal deficit is now more likely. The inevitable result will be state debt that will rise even more, which will make it even more difficult to reign in future spending.”
How individuals and businesses position themselves in the current environment is important, Roodt said.
“Be aware of developments, identify your risks and manage your risks. One way of managing our risks is to ensure that your portfolio is properly diversified – including a significant diversification abroad.
“Finally, there remain many attractive investment opportunities in South Africa. A weak currency, juicy yields and a liquid market are all attractive characteristics of the SA financial markets.”
However, Roodt once again cautioned that South Africa was in ‘deep trouble’ before this latest crisis.
“The virus will only make things worse and there is not much we can do about it. Instead of putting the country first when we had the opportunity, our political leaders were more concerned about their own political agendas. That is why we are not ready for this mess.”