The global impact of the coronavirus (Covid-19) has quashed the chances of a recovery in South Africa’s economy this year, as Chinese demand for the country’s exports weakens, the supply of key imports is disrupted, and both leisure and business travel take a severe knock worldwide.
Economists have slashed their growth estimates for 2020, and Moody’s Investors Service cut its forecast for SA to 0.4% from 0.7% – just a notch above last year’s feeble increase of 0.2%, which was the lowest since the global financial crisis a decade ago.
The disruption to global markets, coupled with a plunge in oil prices, have already knocked the rand to its weakest level in five years, and could herald the start of a recession in several countries – including the US, where the longest expansion in the world’s biggest economy is now expected to end.
The Organisation for Economic Cooperation and Development (OECD), which groups the world’s main industrialised countries, has warned that global growth could drop to 1.5% this year, half the rate it projected before the virus outbreak in China three months ago.
Analysts say the consequences of the anticipated sharp slowdown in the Chinese economy shows how vulnerable globally integrated companies and their supply chains have become.
SA is particularly exposed as China has been its main trade partner for a decade, with the country taking most mineral exports and supplying most of its main imports, particularly consumer electronics.
“The ultimate extent of the Covid-19 epidemic remains unclear. SA industries are already feeling the impact, and there is a risk that the consequences could worsen significantly,” SA’s Trade & Industrial Policy Strategies said in a research note on 3 March.
“If the downturn in China persists or deepens, SA’s mining industry in particular will suffer significant losses, with an impact on workers and communities as well as companies. Smaller industries will also suffer, something already occurring in fisheries.”
China appears to have contained the virus through draconian measures involving the strict quarantine of millions of people.
But the illness has spread to more than 100 other countries, which will not be able to impose such extensive control on their populations.
But people are postponing their travel plans, sporting events have banned spectators and large conferences have been cancelled.
The International Air Transport Association (IATA) said on 5 March that global revenue losses for passenger business alone could amount to $113bn in 2020, and urged governments to provide relief on taxes and charges for the airline industry.
This is a threat to the business rescue plan for SA Airways (SAA), although its practitioners say that there has been “no material impact” on bookings yet.
Flybe, Europe’s largest regional airline, has collapsed into administration after a government rescue bid fell apart due to the impact of the coronavirus.
“Global airlines are coming under extreme stress from cancelled and no-show bookings as well as future bookings being cancelled,” says Intellidex analyst Peter Attard Montalto.
“This is likely to have a severe impact on SAA’s existing and even profitable routes. It accelerates the need for additional cash from financial state-owned enterprises and government.”
Attard Montalto has cut his growth forecast for SA this year to 0.1%, mainly on downward revisions to global growth estimates from both the OECD and the International Monetary Fund, after also taking account of continued power outages and the recession in the second half of 2019.
Jacques Nel, head of Africa Macro at NKC Africa Economics, has lowered his forecast for 2020 to 0.2% – unchanged from last year.
The announcement of SA’s first coronavirus cases “presents another potential knock to growth” if businesses, restaurants and other retail outlets start to close, he says.
PwC economist Lullu Krugel says her worst-case scenario points to a recession, with the economy shrinking by 0.5%. “We are expecting virtually no growth this year, and a contraction if things go wrong,” she says.
Although the fatality rate of the coronavirus is not as high as in previous epidemics, the impact is greater as China now accounts for about 17% of global GDP, compared with 9% in 2009, she says.
SA industries which would be hardest hit include mobile operators, automotive manufacturers and hospitality and retail establishments, she adds. Tourism would also suffer with a potential loss of R200m in spending by Chinese visitors, suggesting that around 1 000 jobs in the sector could be on the line.
A silver lining to the cloud is the outlook for interest rates – after the US Federal Reserve cut borrowing costs in an emergency move on 4 March, rate cuts followed in Canada, Asia, and the Middle East.
SA’s Reserve Bank governor Lesetja Kganyago has indicated that the central bank is also likely to take the same step, and analysts expect two more cuts amounting to 0.5 percentage points this year.
Another bonus is that a historic plunge in oil prices should help to alleviate the effects of any spike in inflation caused by the rand’s plunge to a five-year low against the dollar on 9 March.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.