We are not ready for this. We haven’t even found the cure for our own ailing state-owned enterprises and now here it is; a virus named “corona”, nogal.
Worldwide markets are stumbling. Indices fluctuate by the equivalent of hundreds of billions of dollars daily. Investors are panicking, policymakers are at a loss.
And while measures are put in place to contain the spread of the virus, the domino effect is likely to be as dire as the final outcomes are uncertain.
From the wo/man in the street to the trader on Wall Street; all of us are already experiencing the cumulative impact on the global economy and the world’s financial markets. And until we have more clarity on the eventual outcome of this pandemic and its impact on economic activities, financial markets will remain unstable.
Of course, SA is not spared. While it is impossible to accurately predict what the impact on the SA economy will be, we have previous crises to learn from.
First and foremost we need to acknowledge that our economy was on the way to the ICU long before the coronavirus came along, no thanks to a dysfunctional and destructive government. It is, as the saying goes, what it is.
Based on what we know about our economy BC (Before Corona), and by superimposing our experience of previous crises over our estimates, we can form a picture of what can be expected over the next few quarters. Please note, these are rough estimates and will be affected by several variables.
Corona or no corona, we expected weak growth for the first quarter of 2020. But with the coronavirus being the new reality, growth in the first quarter is now almost certainly going to be another contraction. The effect of the crisis became more pronounced at the tail-end of the quarter - so expect something like -2%.
Based on previous experience, the second quarter is likely to be the most affected. A huge contraction of around 6%, or more, can be expected.
After a horrible second quarter, the third quarter should look much better, partly due to the base effect of the second quarter. We expect third quarter “growth” of around 0%. The fourth quarter is similarly expected to be even better, and our model suggests growth of approximately 0.5%.
Should these quarterly estimates prove to be correct, growth of approximately -1.8%, or even worse, could be expected for the year as a whole.
Note again, these estimates are based on our BC estimates adjusted for our experience during previous crises. Remember; the important part is not the actual estimates but rather the expected pattern.
What is clear is that it will serve no purpose to complain about economic growth for 2020, because there won’t be any. And the weaker economic expansion will result in several economic variables deteriorating: like fiscal debt-, fiscal deficit- and current account deficit ratios relative to GDP.
Dialling P for policy support
A deterioration in these variables will inevitably only hasten a downgrade. So, what can we expect by way of policy support?
An obvious and likely policy reaction was this week’s full percentage point interest rate cut.
The fact that monetary policy is available to support the economy during times like these attests to the sensible way monetary policy was conducted in the past. Despite calls from all and sundry, the SARB kept monetary policy relatively tight. And now that we need monetary policy support, the SARB has dry ammunition available.
Unfortunately, monetary policy support is unlikely to provide much support for the economy, although some peripheral benefits are likely.
What we really need is significant fiscal policy support. We need the state to cut taxes and even increase spending to support the economy. Unfortunately, this option is not available.
For years the country's fiscal accounts have been mismanaged. State debt has reached unsustainable levels and, even before the coronavirus, the deficit was budgeted to reach nearly 7% of GDP. Now, with weaker GDP, even lower taxes and more pressure on spending, a significantly higher fiscal deficit is now more likely. The inevitable result will be a rise in state debt, which will make it even more difficult to rein in future spending.
Government should have taken the difficult decisions to address the deterioration of the fiscal accounts when we had the opportunity. But instead of acting responsibly, the ruling party blundered, driven by idiotic ideology, mismanagement and cadre deployment, and drove state finances into the ground.
We have no more dry fiscal ammunition left.
How individuals and businesses position themselves in the current environment is important. Be aware of developments, identify your risks and manage your risks. One way of managing our risks is to assure that your portfolio is properly diversified – including a significant diversification abroad.
Finally, there remain many attractive investment opportunities in SA. A weak currency, juicy yields and a liquid market are all attractive characteristics of the SA financial market.
But make no mistake. We were in deep trouble before this last crisis. The virus will only make things worse and there is not much we can do about it.
Instead of putting the country first when we had the opportunity, our political leaders were more concerned about their own political agendas.
That is why we are not ready for this mess.
* Dawie Roodt is the chief economist at the Efficient Group