South Africa is turning to international lenders to help cover the costs of a steep recession and a rapid deterioration in its finances triggered by the coronavirus pandemic and two consecutive credit rating downgrades, which tipped its sovereign debt completely into junk territory.
The country's economy is now expected to contract by at least 4% this year while its budget deficit swells to more than 10%, according to independent forecasters and the South African Reserve Bank.
Job losses will be severe, while hundreds, if not thousands, of business failures will sharply reduce potential economic output and curb the pace of recovery in the years ahead.
Conditions will worsen if a three-week lockdown imposed to protect South Africans from the coronavirus is extended beyond 16 April, and business is urging the government to ease some of the restrictions on their activities.
But SA's predicament is far from unique – governments everywhere are sitting with the same tough decision and many have blown their budgets in their efforts to limit the spread of the virus and mitigate the impact of similar lockdowns. A global recession now looks very likely.
Developing countries have been hardest hit in the wake of heavy capital outflows triggered by the turmoil in financial markets, which is far worse than during the global financial crisis just over a decade ago.
In SA, foreign selling of equities and bonds amounted to about $6bn in the year so far, the Reserve Bank's head of economic research and member of the monetary policy committee Chris Loewald said on 6 March.
As a result, the cost of SA's debt has soared and there are fears this could worsen after the country drops out of the World Government Bond Index at the end of April – the consequence of being downgraded to junk by Moody's Investors Service on 27 March. Fitch already had SA's sovereign debt at sub-investment grade but followed with another downgrade a week later.
At the same time, SA has to borrow more money than it anticipated this year to cover higher debt service costs, increased health spending, and to soften the blow to the economy, which has put millions of jobs at risk, particularly in the tourism and hospitality sectors. Informal jobs will be even harder hit.
Part of this can be financed by issuing more government bonds, but the market's ability to absorb the debt will limit the size of the potential increase, which economists estimate could amount to 25% more than the amount planned in the Treasury's February budget.
Considerably more money than this will be required, although it is hard to estimate the exact amount given that the total cost of additional health spending is unknown and because government needs to come up with additional measures to support businesses and people who lose their jobs.
Top National Treasury officials have said that SA will get a $1bn loan from the New Development Bank, which it established in 2015 with China, India, Brazil and Russia. The interest will be far lower than what it pays on government bonds as the bank has a credit rating of AA+.
They have also admitted that SA may also approach the World Bank and the International Monetary Fund (IMF), which have both made money available for countries worldwide which need support to deal with the impact of the coronavirus.
In the case of the IMF, if SA applies for loans, they will be extended rapidly with few or no conditions – a far cry from the classic bailout, where countries need to meet strict criteria to receive loan tranches.
The problem is that the resources of both multilateral lending institutions will be stretched to the limit in the face of huge demand from developing countries and emerging markets.
The World Bank has said it will make $160bn available over the coming 15 months to help countries respond to the immediate health consequences of the pandemic and bolster their economic recoveries.
The IMF has total resources of $1.3tr, but only $787bn is available for lending, according to the Peterson Institute for International Economics, based in Washington. A large chunk of the money reflects pre-existing lending commitments and some members with quotas that are expected to be available for lending will need to themselves borrow from the IMF.
Capital Economics economist Edward Glossop points out that while the IMF might have enough money to bail out many small developing economies, it might struggle if its lending facilities are also tapped by SA and Turkey.
A study by the European Central Bank in 2017 suggested that in a severe “sudden stop” episode such as the one which is now playing out in global economies, IMF resources would probably struggle to meet the surge in demand. Capital outflows from emerging markets are already four times larger than they were in the global financial crisis of 2008-2009.
Many economists believe that to step up its borrowing with the most favourable conditions, National Treasury needs to come up with an emergency budget to show how it plans to deal with the crisis and get its finances back on track in future years.
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.