As global cases of the coronavirus continues to rise, early data from South Africa’s first week of lockdown gives some hope that the country is effectively ‘flattening the curve’ – but the drastic measures taken to do so come at a heavy price.
According to economists from the Bureau of Economic Research (BER), South Africa is currently experiencing a sudden triple stop in the economy due to the fallout of the coronavirus:
- A massive decline in global demand for South African exports;
- A lockdown-induced plunge in domestic production (and demand); and
- A steep decline in foreign capital inflows to SA.
“One of these sudden stops at a time would be bad enough, three at the same time are both rare and particularly damaging. On all three fronts, the news was bad last week,” the BER said.
Drop in demand
The drop in demand for South African exports is down to the fact that the country is not alone in facing the global pandemic, and foreign markets are also severely constrained – especially South Africa’s biggest trading partners.
Globally, many Purchasing Managers’ Indices (PMI) plummeted to record-low levels in March, while another shock employment figure from the US was also seen. Eurozone markets are also being severely affected.
US weekly jobless claims measured an unprecedented 6.6 million for the week ending 28 March. Furthermore, the monthly US jobs report showed a larger-than-expected rise in the unemployment rate in March, with more job losses in the offing.
“Better news was that the Chinese PMI rebounded in March after February’s plunge. However, this reflects a slow return to normal conditions and not a significant ramp-up in output levels. So far, it seems as if China managed to weather the virus storm fairly well,” the BER said.
Plunge in production
Data from Eskom reflects the plunge in productivity – where previously it was a day-to-day fight to meet demand, now the power utility shows that electricity usage dropped by as much as 9,500MW (i.e. “equal to more than a ‘stage nine’ of load shedding”).
Furthermore, new vehicle sales – a leading indicator of consumer spending – plunged in March to its lowest monthly sales volume since December 2009.
“The vehicle manufacturing sector will also be hit hard in April, with most local plants announcing closures even before the lockdown due to a sharp drop in demand. Manufacturing overall will take serious strain in coming months,” the BER said.
The Absa PMI for March showed that respondents turned the most pessimistic about business conditions six months’ ahead in the series history (since 1999). The expected business conditions index fell to an all-time low of 29.1 index points, surpassing levels seen during the 2008/09 recession
Loss of foreign capital
Regarding capital flows (the third sudden stop), JSE data revealed further significant selling of SA assets last week.
“In response, the rand exchange rate had a terrible week, weakening past R19/$ late on Friday. This brings the currency’s year-to-date losses versus the US dollar to 36%,” the group said.
The rand’s big knock came on the back of ratings agency Fitch further downgrading South Africa deeper into junk – just a week after Moody’s downgraded the economy to sub-investment grade.
Both ratings agencies broadly covered the same issues in the country: weak economic growth, unstable power generation, and more recently, the coronavirus lockdown with little to no real plan for a way to help the economy recover from it.
The BER warned that the pain is not over, with markets looking to May 27 for S&P Global’s rating review, which could follow the same path.
“While S&P may downgrade further in May, beyond that a further credit rating deterioration is not inevitable,” the BER said.
“The swift response to enable additional radio spectrum before the start of the lockdown is an isolated example that when pushed, SA has the ability to implement speedy structural reforms.
“If there ever was a time for fast-tracked broader reforms, this is it. President Cyril Ramaphosa has shown strong leadership in dealing with the health crisis. Post Covid-19, we need the President to show the same leadership on the growth and fiscal crises facing the country.”
This does not necessarily imply major austerity measures, but rather reforms that improve the competitiveness of the economy, it said.
Areas such as a large-scale allocation of additional spectrum, fast-tracked green energy investments, doing away with vanity projects such as a state bank and a sovereign wealth fund, as well as limiting the rise in the public sector wage bill, should be key focus areas.