Moody’s Investors Service piled on the misery as the country went into a 21-day lockdown to stop the spread of the Covid-19 coronavirus. Economists are predicting that the economy could shrink significantly
The ailing South African economy, which is already in recession, has taken a double hit with the lockdown imposed due to the Covid-19 coronavirus outbreak and Friday night’s downgrading to “junk” status by Moody’s Investor Service ratings agency.
Moody’s piled on the misery as the country went into a 21-day lockdown to stop the spread of the virus.
The lockdown, announced by President Cyril Ramaphosa earlier in the week, is set to shave billions from South Africa’s gross domestic product (GDP) and send the economy deeper into recession.
Some economists are predicting that the economy could shrink by 4% to 5% this year, a big leap from the 0.2% projected by the SA Reserve Bank before the impact of Covid-19 became a reality.
The crisis caused by the pandemic is set to cost up to 1 million jobs, adding to the 10.1 million already unemployed.
South Africa’s debt level is currently at R3.5 trillion, 70% of GDP, and could rise to 90% in a few years if drastic action is not taken.
By last night nearly 630 000 people were infected with Covid-19 around the world and the death toll was climbing towards 29 000. In South Africa there have been 1 170 infections and one death.
TITO: THEY CAN BURN ME ON STAGE
If the time comes and South Africa has to go to the International Monetary Fund (IMF) or World Bank for financial assistance, finance minister Tito Mboweni says he would not think twice – but we are not there yet.
Speaking to City Press a day after Moody’s downgraded the country to “junk” status in the middle of an economic shutdown due to the Covid-19 coronavirus outbreak, Mboweni said that on Friday both the IMF and World Bank undertook “to open a new facility to support countries suffering from coronavirus, especially in Africa and other developing countries”.
He said he was “prepared to make difficult choices even if people burn me on the stage”.
On possible political pressure on him and the president, Mboweni said: “I do not care. I just have to do the correct thing. We will do what we have to do to get the country financially sound.”
He said he has asked his team in the Treasury to start looking at possible scenarios where South Africa would have to look to the IMF and World Bank for possible recourse, but this was only a forward-planning measure so that we are not caught off guard.
“There is no time for ideology. If not IMF, then give me the money. I cannot eat ideology,” he said.
He said a billion-dollar facility was also available through the bank of the Brics group of nations: Brazil, Russia, India, China and South Africa.
Mboweni said that as a result of the credit downgrade and the coronavirus economic shutdown, Treasury was now looking at a possible lower economic growth forecast and even lower revenue collection, and the Treasury had to do “serious expenditure revisions”.
He said technical teams in Treasury and the Reserve Bank were already working on revising the assumptions that informed previous budget statements and working with new ones.
“The situation has to change drastically and we have to speed up structural reforms, which include things like the release of spectrum; pending finalisation of public-private partnerships at the harbours; and the creation of a new airline. We must move with more speed. We have to speed up the structural reform programme. We have to move full steam.”
He said Moody’s is the last of the three global credit rating agencies to downgrade South Africa, as the markets would have already priced in their decision.
He said that he met with the Moody’s committee earlier in March and, from the discussion, he got the impression that they would not downgrade us.
He said the agency’s representatives broadly seemed to understand our situation.
However, said Mboweni, “I will not begrudge them that.”
He said the coronavirus outbreak has brought in new complications and “threw the finances into an orbit”, including an economic shutdown that would have a negative impact.
He said that he would have preferred that relief funds be put in the national disaster fund – which already had R150 million from the treasury and the National Lotteries Commission — but it seemed like some big money donors had different ideas despite the discussions he had had with them.
He warned that efforts to deal with the coronavirus pandemic “must not be reduced to financial issues because it is an immediate health matter”. He said the government interventions at the health level were sufficient and “there should be no panic around that”.
On criticism that government had not been able to manage debt levels, he said that administrations of government from 2010 onwards were a waste of time and “we reversed the gains made since 1994”.
“We allowed state capture and expenditure commitments that were not in the baseline,” he said. Therefore, debt levels rose and debt servicing costs also went up, he said, adding that money meant for infrastructure was subsequently used to service debt and the public wage bill became unsustainable.
NATION IN ‘EXISTENTIAL CRISIS’
Business leaders and economists said the twin blows have thrown the country into an existential crisis, risking the viability of the nation.
Although the Moody’s announcement did not come as much of a shock because of the performance of the economy, business leaders said the timing could not have been worse.
Black Business Council president Sandile Zungu said: “We are very disappointed about the downgrade, but the signs were there. We now risk not having a functional state. The downgrade together with Covid-19 means we are now facing an existential crisis from a nation state point of view. It is not just a health and economic crisis.”
Zungu said he feels sorry for small companies as the cost of doing business, which is already high, is expected to increase significantly.
Zungu said it would take the country no less than three years of hard work to return to investment grade.
He said that, while it was damaging, the 21-day lockdown was critical in order to flatten the curve of the spread of the coronavirus.
“It is important to have a healthy society to contribute to the economy. Our plea to South Africans is to observe the instructions and guidelines of social distancing. The economy is in the intensive care unit and if we don’t take considered steps, we will drown in our own tears,” he said.
He urged government to shift industrial policy and pay greater attention to small and medium enterprises, the sector “that will employ a lot of people when the economy eventually swings around”.
Business Unity SA’s president Sipho Pityana said the country was “in a very difficult position”, with the Covid-19 impact likely to set job creation back by many years and the downgrade hurting the country’s fiscus badly.
“The debt we have today will suddenly become much much more expensive. The rating says to lenders: ‘Please be careful when you lend money to these people, they may not be able to repay.’”
“We will have to take very tough decisions and it will be easy if government, labour and business community hold hands to address this,” said Pityana.
Tough decisions, he said, include the country’s unsustainable debt-to-GDP levels and significant economic reforms, including the introduction of logistics hubs and private players in the supply of electricity.
“At the moment, we have a lethal combination: lack of access to capital and energy shortages. These are key tools needed to get any project off the ground. Any investor looks at these before making a decision to invest,” he said.
Lumkile Mondi, an economist and nonexecutive director of the Small Business Institute, said the downgrade meant South Africa would now be excluded from the FTSE World Governing Bond Index (WGBI), and the government bond market would experience further capital outflows as fund managers with investment grade mandates would be forced to sell South African government bonds.
Non-residents hold about 37% (R800 billion) of the total domestic government bonds, and the number is expected to substantially decline with the combined impact of Covid-19 and the downgrade.
This will result in outflows totalling more than R100 billion.
However, Mondi said government should stop focusing on credit ratings and rebuild an inclusive economy through a gigantic public works programme, using funds from the Public Investment Corporation and other pension funds to build social infrastructure.
Lungisa Fuzile, chief executive of Standard Bank SA, said: “The progress made by government in addressing some of the growth and governance concerns has been surpassed by the Covid-19 pandemic,” adding that the deteriorating global economic outlook would also “exacerbate South Africa’s economic and fiscal challenges … Our immediate responsibility is to support government’s containment initiatives to flatten the curve of Covid-19.”
The Minerals Council SA, which represents the mining sector, said that, while Covid-19 and deteriorating global conditions had harmed South Africa, “this downgrade is largely as a result of government’s own making over an extended period”. It said the government had delayed making necessary reforms.
Deputy Finance Minister David Masondo told City Press that the immediate effect of Covid-19 on companies had been the disruption of money flows to pay workers, banks and suppliers.
In response, “government has embarked on a number of fiscal, monetary and industrial policy measures to ensure that businesses do not close down, workers do not lose their jobs and households are able to maintain or improve their living economic standards.”
Tax measures were being implemented, he said, with PAYE being deferred for four months to help with liquidity for companies with a turnover of less than R50 million. This would help 75 000 small and medium enterprises.
“Over 4 million workers will be given additional assistance of R500 a month through the Employment Tax Incentive. The reduction of contributions to the Unemployment Insurance Fund (UIF) and the Skills Development Levy will allow workers to keep more money in their pockets and small businesses to maintain liquidity,” said Masondo.
“These measures are not going to require additional spending. They are being funded by a combination of drawing down surplus funds [such as the UIF, which has a surplus of R150 billion] and the newly created Solidarity Fund, which is receiving donations from South Africans.”
He said the SA Reserve Bank had “moved strongly to assist with financial injections into the economy to ensure that the health crisis does not become a financial crisis”.
This comes after the bank cut the repo rate by 100 basis points, pumping additional liquidity into capital markets and announcing that it would purchase government bonds.
These measures meant that consumers would have more relief and banks would be able to give payment holidays, said Masondo.
The banks are providing additional working capital to fund operating expenses or losses for a limited period to ensure companies do not close.
Bond yields, which are a primary determinant of how much government pays for issuing debt, have come down to about 11% from the highs of last week – about 13% – for the 10-year bonds.
Masondo said government had increased public health funding through reprioritising the existing state spending envelope.
This included a R466 million addition to the national disaster funding already provided, and underspent funds on other items – as a result of the slowdown and lockdown – were being redirected towards health, protection and social services.
He said government departments were also shifting funds from back-office programmes to frontline services, and Treasury was expediting approvals of these requests for budget shifts.
He added that, with respect to the budget tabled last month, “nothing prevents the Treasury from amending the Appropriation Bill currently before Parliament to take into account recent developments”.
THE ECONOMY AFTER COVID-19
Once the deadly Covid-19 outbreak has been brought under control, South Africa has an opportunity to accelerate structural reform geared towards both private and public investment-led inclusive growth.
With the country having been already in recession prior to the outbreak, Masondo said that increasing money flow into the economy through low interest rates, quantitative easing, tax deferrals and holidays, as well as increasing government borrowing, were neither sufficient nor sustainable interventions for future economic growth.
“Using both debt and taxed finance mechanisms, we will have to seriously drive massive public infrastructure investment programmes in health, roads, energy and transport logistics. It is unacceptable that we have not fixed commuter rail, which forces poor people to spend more of their income on transport costs,” he said.
“The pandemic has added an impetus to urgently roll out the National Health Insurance, which also requires massive investment in public health infrastructure.”
Masondo said sorting out state-owned enterprises such as Eskom and Transnet would be key to getting the economy going again.
He said the pandemic “has reminded us that remote learning and working using Skype, Zoom, email and elearning platforms, which also lowers traffic congestion, is desirable and necessary in this era”.
Furthermore, he said, buying goods and services online would become more common.
“All this will require us as government to urgently move with the allocation of spectrum and reliable electricity supply,” he said.
Masondo said Parliament also needed to “finalise land reform not only to create policy certainty, but also to provide more land to farmers to increase food production and other agricultural products”.