Negative effect of Covid-19 on SA economy to escalate, say economists


Economies worldwide are staggering under the devastating effects of the Covid-19 coronavirus pandemic and there are fears that the South African economy will be forced to its knees as shops close their doors and people go into lockdown.

But while central banks in various countries have already pledged billions of dollars in to support their economies, businesses and workers that have lost their jobs, South Africa is still waiting for details of the economic stimulus package that President Cyril Ramaphosa promised last week.

Economic growth

With China, the US and countries in Europe expected to experience economic contraction in the first half of the year, South Africa’s growth prospects are grim.

Johann Els, chief economist at Old Mutual, said the economy could shrink by 2% this year and the country’s budget deficit could rocket to 10%, instead of growth of 0.9% and a budget deficit of 6.8%, which were forecast during the budget in February.

PwC expects a contraction of 1.5% – also significantly greater than the Reserve Bank’s most recent estimate of 0.2%.

Job losses

The impact on jobs could be enormous. Economists said it would be difficult to forecast the effect, but that thousands of jobs would be lost, especially in industries such as tourism, accommodation and the mining industry, said Els.

South Africa does not have the sort of fiscal manoeuvring room that countries such as the US do, which means we will have to lend more money in order to make money available for extensive fiscal aid measures.
Johann Els

Geordin Hill-Lewis, a DA member of Parliament and the party’s spokesperson on finance, said the country could lose up to a million jobs. In a letter addressed to Finance Minister Tito Mboweni on Wednesday, he said the country was facing a full-blown recession.

He asked for government to come up with its economic aid packet quickly, as promised by Ramaphosa last Sunday, in order to prevent thousands of small and medium business enterprises (SMEs) from laying off employees or closing shop.

Hill-Lewis told Rapport he was overwhelmed by phone calls from SMEs that can’t afford to hold out another two weeks. Some have already closed, because they do not have the money to pay their workers at the end of this month.

Lullu Krugel, chief economist at PwC, said the impact of Covid-19 on the economy could be seen within a month at SMEs and industries such as accommodation and tourism would be hit the hardest.

She said that for larger businesses, it would take between three and six months, but it also depended on various factors, such as whether their employees could work from home or not.

Lullu Krugel is chief economist for PwC Africa. Picture: Supplied

The ILO expects that between 5.3 million and 25 million people worldwide would lose their jobs as a result of the pandemic, and the resulting restrictions on businesses, quarantine and travel restrictions.

During the financial crisis of 2008/2009, unemployment increased by 22 million, worldwide.

At the time, South Africa lost a million job opportunities, sending the unemployment rate to 24% At present, the unemployment rate is stands at 29%.

Limited government aid

On Friday, the US promised its citizens $1 trillion in aid, the European Central Bank this week announced a quantitative easing programme of $820 billion and various other central banks were pitching in to see where they could help support their companies.

In South Africa, assistance has been limited. An an interest rate cut of 1% to bring relief for debt repayments was announced this week.

Further measures include provision for businesses to apply to the Unemployment Insurance Fund for assistance and the department of small business is making R1 billion in support packages available so that smaller businesses can produce important consumer goods.

The Reserve Bank on Friday announced measures to ensure the cash flow between banks and the finance market, after challenges with liquidity were noticed.

Els said it was a small step in the right direction, because it would make it easier, cheaper and more regular liquidity.

At a media conference on Monday, Mboweni said that money from the National Disaster Relief Fund would be used and money would also be redirected from other programmes but by Friday night, no further details of these measures were made available.

The Banking Association of SA said it was in conversation with the banking regulator and the competition authorities about how banks can best protect their clients, SMEs and staff as well as help manage the economic impact. No announcement relating to such measures had been made by Friday either.

What other countries are doing

Annabel Bishop, an economist at Investec, said policy measures in other countries included cash out of state coffers, support to SMEs, payment holidays for mortgages and other loans, support to financial institutions, additional medical benefits, quantitative easing and easing of strict compliance requirements for banks.

Although South Africa has adopted certain measures to stabilise markets, strengthen the health system and prevent the spread of the disease, nothing has yet been done to assist households that have lost their income, or companies battling to pay debt under circumstances where trading has declined, she said.

Industries that could suffer

Nedbank’s economics unit said the virus outbreak could affect export-orientated industries in particular, including mining and manufacturing as well as the travel industry, tourism and the hospitality industry, which have already begun to feel the impact of travel restrictions and a ban on the sale of alcohol after 6pm.

Krugel agreed that the effect on tourism, hotels and the accommodation industry was already apparent. PwC estimate a potential loss of at least R200 million in money that the Chinese tourists alone would have spent. This calculation, however, was done before visas to travellers from China were cancelled last Sunday.

Krugel said the more labour intensive the industry, the more difficult it would be to continue production.

Economies worldwide are staggering under the devastating effects of the Covid-19 coronavirus pandemic and there are fears that the South African economy will be forced to its knees as shops close their doors and people go into lockdown.

Els said that the mining industry was also highly exposed in this regard.

What it means for the state’s tax revenue

Economists have warned about the impact on government’s tax revenue if the economy grinds to a halt, but said the calculations are difficult.

The collection target of tax revenue had already been adjusted downward for the current book year by R10.7 billion in February, as a result of poor economic growth.

Tertius Troost, a tax expert from Mazars, said any contraction in the economy would have drastic consequences.

After the 2008/2009 financial crisis, the Treasury reduced its estimate for gross tax revenue by about 5%. If the present revenue collection target of R1 425 billion (as contained in the February 26 budget) is adjusted downward by 5%, that would translate to R70 billion less.

Troost said weaker growth often leads to job losses and this means to less tax flowing through the ongoing pay as you earn system. Loss of or reduced income also leads to less consumer expenditure, leading to lower VAT collection and companies also pay less taxes because of reduced profits.

What South Africa can still do

Els said that South Africa does not have the sort of fiscal manoeuvring room that countries such as the US do, which means we will have to lend more money in order to make money available for extensive fiscal aid measures.

Troost said that the problem in South Africa was that all tax revenue was needed by government for the provision of basic services. This would make it difficult to find the money to make available to other business enterprises.

South Africa’s options include:

  •  Tax relief and the extension of the deadline for companies to submit their tax returns (as was the case in the US), said Els;
  •  More interest rate cuts will also help and are in the pipeline, because the Federal Reserve’s decision to cut their interest rate by 150 basis points have created the space for South Africa to make further cuts. Low inflation rates in South Africa also makes it possible to cut the interest rate by a further 50 basis points, said Els. Peter Attard Montalto, of Intellidex, said the Reserve Bank would have to announce more relief before its next monetary policy meeting in May, especially because the Treasury will not be able to provide any assistance.

“South Africa is two to three weeks behind Europe, but it would be a mistake to think that give us room. It does give us the opportunity to respond sooner, rather than later.”

  • A reduced VAT rate would encourage consumers to keep spending, and consequently giving the economy a boost, would also an option, said Troost.
  • A temporary suspension of PAYE payments for employees could also create relief, Nicola Kleyn, of the Gordon Institute of Business Science told eNCA.
  • Payment holidays on loans are also an option, according to Attard Montalto.
  • Payment holidays of rent by SMEs, was one of the DA’s proposals.
  • Once-off allowances for households that are battling, or for people who lose their jobs, was a suggestion by Theo Vorster, of Galileo Capital.
  • An increast in the VAT threshold for SMEs, from R1 million to R2 million, said the DA’s Hill-Lewis.
  • Temporary relief for businesses in payment to the UIF. According to the DA, the UIF has R50 billion in assets, but only pays out about R4.5 billion every year. The fund currently has R180 billion in cash, and can easily suspend payment for the next four months, without affecting the benefits of employees.
  • The DA also suggests that private medical aids cover for Covid-19 tests for free on all medical aid plans without unnecessary conditions.
  • Relief from municipal taxation for businesses in municipalities that can afford it and business rescue to prevent business going under, are part of the DA’s plans.

– Additional reporting by Netwerk24

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