SA's deep recession is dragging down neighbouring states

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  • The South African economy will face its deepest contraction in 90 years, which will arguably pull down the economic performance of neighbouring states.
  • A quick economic recovery for South Africa could positively impact the recovery of southern African countries.
  • Countries with diversified economies are better positioned for recovery than those with less-diversified ones.
  • Countries will require expansionary fiscal policy to recover, but they need to keep tabs on this so as to ensure public debt remains sustainable.

The South African economy, arguably the "engine" among member states of the Southern African Development Community (SADC), will face its deepest recession in 90 years because of the impact of the Covid-19 pandemic.

This was set to put a "handbrake" on growth for neighbouring countries, according to analysts.

Last week, both ratings agency Moody's and the African Development Bank (AfDB) issued reports on the economic outlook for African states. While a number of countries will report contractions, others will manage to eke out growth amid the global recession.

The AfDB's latest projections show real GDP for Africa could contract by 1.7%, but a worst-case scenario with a protracted duration of the pandemic will result in a contraction of 3.4%.

The situation becomes messier when assessing regional performance.

Particularly in southern Africa, the performance of neighbouring states would be influenced by the economic contraction in South Africa, said professor of development finance and economics at the University of Stellenbosch Business School Charles Adjasi.

Due to the frameworks for trade relations and investment flows between SADC member states, a slowdown in economic activity in South Africa would spill over, he added.

While some countries might not have as intensive lockdowns, a harsh one in South Africa would ultimately be felt by them, especially smaller nations such as Lesotho and eSwatini, said Adjasi. "A slowdown in our economy will heavily dent the economic activity of most SADC countries."

Countries reliant on capital remittances from migrant workers based in South Africa will also feel the impact of retrenchments and reduced incomes.

"Most of these [migrant] workers lost jobs or had a situation where incomes were reduced or lost. This means the remittance flows to countries will slow down," he pointed out. This will result in a shock to household incomes and consumption in these countries.

When it comes to recovering from the impact of the pandemic, Adjasi said the rest of the countries would also be influenced by the recovery of the South African economy. "It is relatively easier for the rest of the countries to recover faster if SA recovers quicker, because of the strong interdependence."

Engine room

"Countries are heavily dependent on SA as the engine room for growth in the region," said Dr Martyn Davies, Deloitte's managing director of emerging markets and Africa. "SA has been a laggard by any standard in recent times that has been a handbrake of growth in the rest of the SADC region."

Small countries, with non-diversified economies, have been lagging behind before Covid-19, he noted. These include Namibia, Angola and Zambia. The economic crisis in Zimbabwe is also likely to be worsened by the pandemic.

In terms of the continent's performance, both Moody's and the AfDB expect commodity-exporting countries such as South Africa, Nigeria, and Botswana, and those heavily reliant on tourism such as Mauritius to be among those which will be hard hit by the impact of the pandemic.

Countries with less-diversified economies will have a hard time to recover, noted Jibran Qureishi, the head of Africa research for Standard Bank.

Resource-based economies which were less diversified would be less resilient to the current challenges, he explained.

"The diversified economies will be more resilient. However, no economy has been spared from the determinantal impact from the pandemic," Qureishi said. "More diversified economies in East Africa, could perhaps avoid a recession, even though growth will probably fall to the lowest in 12 years there."

He added domestic containment measures implemented by countries resulted in a shock to their economic growth. "The pandemic resulted in a dislocation of global supply chains, restrictions in cross-border travel and weak external demand. All these factors inherently weighed down economic activity."

In a report on the African sovereigns issued last week, Moody's said the economic effects of the health crisis would increase social risks, namely further increases in already high unemployment.

Countries will have to resort to fiscal stimulus packages and other policy measures to provide social support and other health spending to combat outbreaks.

This would subsequently lead to financial deficits, and increasing borrowing that would see debt levels stabilise at materially higher levels, Moody's warned.

"Most authorities have little choice, but to do everything it takes to mitigate the impact from Covid-19. This means that fiscal policies will have to be expansionary," said Qureishi.

"For now, there is a necessity for governments to ramp up pro-poor and social spending. However, when things improve, authorities have to ensure that fiscal deficits are lowered in order to ensure that public debt remains on a sustainable path," he added.

To aid recovery post-Covid-19, governments might have to scale back on non-priority infrastructure projects to support fiscal consolidation efforts, Qureishi said. Efforts should also be made to ensure the banking sector remains liquid to "avoid more challenges" post-Covid-19.

"In fact, formulating policies to instill private sector-driven growth as soon as possible, will underpin the resilience of most economies on the continent, as they look to emerge out of the woods, from the Covid-19 pandemic," he added.

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