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OPINION | Covid-19 and the perils of a declining economy

2020-04-12 08:14
Finance Minister Tito Mboweni. (Jeffrey Abrahams, Gallo)

Finance Minister Tito Mboweni. (Jeffrey Abrahams, Gallo) ((Jeffrey Abrahams, Gallo))

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It remains to be seen how South Africa is going to navigate its way out of the deepening economic crisis when many of the engines of economic growth come to a complete standstill, writes Thembinkosi Gcoyi.

The news of South Africa's sovereign credit downgrade by Moody's Investors Service on 27 March, and the follow-on downgrade by Fitch on 3 April, has sent shockwaves through the South African economy.

It is now standing on the precipice of an uncontrolled economic decline that will exacerbate the widely acknowledged problem of unemployment, especially among the youth, which has been a stain on the country since the dawn of democracy.

The onset of Covid-19 has made what was already a bad economic situation even worse. On the one hand, current projections are that the economy could decline by a whopping 5%. This will be compounded by the forced lockdown which has brought the economy to a standstill.

As has been stated elsewhere, many businesses, especially small ones, will not recover from the impact of the forced closures. Many jobs will be lost in the process with no short-term prospects of them being recovered.

On the other hand, there are many businesses that will realise the full potential of technology during this time. For many small business owners, it will soon become apparent that a physical office is a hangover of a by-gone era when co-location was a necessity to be taken seriously in business. With Covid-19, it has become painfully evident there are many business overheads that can be dispensed with without affecting productivity and co-ordination.

ANALYSIS | South Africa needs to end the lockdown: here’s a blueprint for its replacement

Many of these businesses will be scrambling to find redundancies in their workforce to reduce overheads and improve their chances of survival. First in line, especially in professional business settings, will be support staff such as cleaners, messengers, bookers, secretaries and personal assistants whose functions can feasibly be outsourced to smaller consultancies that charge packaged fees which are far less than keeping somebody on payroll on a full-time basis to perform the required functions.

The office letting business is also going to find the going tough over the next few months. Many of the smaller tenants will simply opt to stay online and not continue with their leases as they seek to realise savings in the short term.

Though this may not be ideal, it will be a useful measure for struggling business that have somehow remained productive through the difficulties imposed by Covid-19.

With the general economic activity having been at its lowest for the past two weeks, the extension of the lockdown by another two weeks on the expiry of the current 21 days is going to accelerate the shift from bricks and mortar to online.

At this stage, it remains to be seen how South Africa is going to navigate its way out of the deepening economic crisis when many of the engines of economic growth will come to a standstill.

News of the ANC not being keen on the finance minister taking an International Monetary Fund (IMF) package for Covid-19 portends the difficulties the government will face in convincing left-leaning forces in the ANC and the broader tripartite alliance about solutions to the economic crisis which threatens to deepen poverty, inequality and joblessness.

ANALYSIS: There is reason for cautious optimism about SA's fight against Covid-19

Students of African political economy know full well the involvement of the IMF in any economy is always a harbinger of economic pain. South Africa will be no different.

The ANC is fully aware that once the IMF has been brought in, ideological discussions about SOEs will need to be resolved fairly quickly. Most likely, such a resolution will favour the IMF's cocktail of privatisation, mass dismissals in the public sector and deep structural reform of the broader economy.

Inevitably, the idea of a "developmental mandate" for the SOEs will be muted and the spasm of resurgent nationalism within the ANC and broader South African body politic will increasingly become obsolete. Not even Tito Mboweni wants the IMF involved, but the country is well and truly out of options at this point.

Leaders in poorer and developing countries the world over are scratching their heads wondering whether Covid-19 is, in fact, heralding a new phase of globalisation where the pulverisation of the nation state will be accelerated as Bretton Woods institutions are once again emerging as de facto governments.

At this point, Mboweni may be wondering, sitting on his farm in Makgobaskloof, what he did to deserve the distinction of being the finance minister under whom the South African economy was mortgaged to the IMF.

- Thembinkosi Gcoyi is the managing director of Frontline Africa Advisory.

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