South Africa's economic outlook has worsened in the face of plans to lift limits on business activity very gradually over the next few months, muting the benefits of extraordinary measures taken by Treasury and the Reserve Bank to cushion the blow of a five-week lockdown.
A severe recession is expected, with some analysts predicting that the economy will contract around 10% this year. Restrictions of varying degrees are set to remain in place until September, when. the spread of the coronavirus in the country is expected to peak.
“Unfortunately, the size of the impact, and the uncertainty around it, is going to be much more than we initially anticipated,” says Lullu Krugel, chief economist at PwC in SA. “The challenge is that a lot of SA businesses, and the economy, were in a tough position before the pandemic.”
Krugel expects the economy to shrink by between 10% and 11% this year, despite the R500bn support package announced by President Cyril Ramaphosa on21 April, and the Reserve Bank’s decision to slash interest rates and ease banking regulations to encourage lending to distressed companies.
It has become clear that the government’s risk- adjusted strategy, which links easing of restrictions in different parts of the country to the spread of the virus and the readiness of the health system, will slow the pace of economic recovery and makes it impossible to predict when normality will be restored.
Hugo Pienaar, chief economist at the Bureau for Economic Research, says that a “V-shaped” pick-up in economic activity during the second half of the year is now very unlikely and he would probably revise his forecast for 2020 to a contraction of between 9% and 10% from 7% in early April.
Peter Attard Montalto, head of capital markets research at Intellidex, estimates an average daily loss to the economy of R3.5bn between now and September, and expects output to fall by 10.6%. “We think that the market vastly underestimates the way the lockdown will unfold and its damage to the economy from here,” he said in a research note.
The numbers are alarming but reflect the global reality, which will make it much more difficult for SA’s economy to recover. The International Monetary Fund (IMF) said on 14 April that 170 countries could slip into a recession this year, with the world economy contracting by 3% – the worst contraction since the Great Depression nearly a century ago.
It warned that the pandemic could stretch into 2021, and that the cumulative loss to global gross domestic product may amount to $9tr. Much worse outcomes are “possible and maybe even likely”, according to IMF chief economist Gita Gopinath.
Millions of jobs in SA are risk, and despite the tax relief and loan guarantees which will be extended to companies in distress, many small businesses will collapse, particularly those in the hospitality and tourism sectors which will be unable to operate before September.
A StatsSA survey published on 21 April showed that nearly a third of 700 companies could survive for less than a month without any turnover, while just over half said that they could survive for between one and three months. Nearly 37% expected the size of their workforce to decrease.
SA’s budget deficit will explode in response to a surge in government borrowing, partly to cover increased spending, but mainly to compensate for the massive blow to expected tax revenues.
Both Krugel and Attard Montalto expect the shortfall to widen to more than 16% of GDP in the 2020/2021 financial year, compared with Treasury’s estimate of 6.8% in its February Budget. The country’s key debt-to-GDP ratio is expected to climb to more than 85%, from the Budget forecast of 65%, Moody’s Investors Service said on 24 April.
In a separate research note on 27 April, the rating agency changed its outlook for the SA banking system to negative from stable, saying that the pandemic would weaken the creditworthiness of banks over the next 12 to 18 months, hurting loan performance and profitability.
One of the big questions is how Treasury intends to finance its enlarged borrowing requirement, as the ability of the government bond market to absorb increased issuance is limited, and rising yields are making the cost of that debt increasingly expensive.
Treasury’s director general, David Masondo, has said that it will borrow R95bn from international finance institutions, including the IMF, the World Bank, the National Development Bank and the African Development Bank.
Interest rates on these loans will be very low and conditions limited, as the lenders are making emergency funds available to developing countries that need support in fighting the pandemic.
Mike Keenan, fixed-income and currency strategist at Absa Capital, says Treasury could also issue foreign currency- denominated bonds worth $3bn to help take the pressure off its borrowing costs. He sees scope for the bond market to stabilise and the rand to claw back some of its losses towards the end of this year, as volatility in international markets subsides.