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The virus, vaccines and the dearth of growth

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The rollout of Covid-19 vaccines in SA holds the key for accelerated economic expansion. Will the government get it right? 


Optimism that the global economy would quickly rebound in 2021 as mass vaccination programmes quash Covid-19, has begun to fade in the face of resurgences of the virus around the world and concern that the vaccines intended to protect against illness will be less effective against rapidly spreading mutations of the virus.

Economists have begun to warn of significant downside risk to projections made just weeks ago, as countries hit by more severe second waves of infections reimpose restrictions on activity and evidence emerges that the coronavirus will remain a global threat for years to come.

“The biggest risks to our more upbeat forecasts for this year relate to the evolution of the pandemic and our efforts to fight it,” said Neil Shearing, group chief economist at Capital Economics, a research consultancy based in London.

“The history of the pandemic so far has been one of hope trumping experience, with governments anticipating that lockdowns will be short-lived, but then retreating as the virus spreads in ways which we failed to envisage.”

Vaccines

The most immediate risks are that the initial rollout of vaccines is slower than anticipated – a problem which the US, UK and Europe are already grappling with – and that the virus mutates in a way that makes the current vaccines less effective, requiring a second round of mass vaccinations and the reimposition of restrictions.

The prognosis is not promising as research by scientists in South Africa has shown that the Covid-19 mutation first identified in the country evades the immune responses triggered by previous infections, on which the vaccines are based. A similar variant sweeping through Brazil may do the same, although the Pfizer/BioNTech shot has been shown likely to protect against the UK variant.

Professor Salim Abdool Karim, the epidemiologist who co-chairs SA’s Ministerial Advisory Committee on Covid-19, warns that new variants are likely to continue popping up everywhere in the world as the virus mutates to escape immune responses. These variants, or mutations, are created more easily when the virus spreads rapidly.

“It’s a bit like a cat-and-mouse game. We’ll vaccinate people and the virus will try to escape. It will do so successfully every now and then, and every time it escapes, we will have to adjust our vaccines. That’s pretty much how it’s going to work,” he said in an interview with finweek.

But this is not a reason to halt planned vaccination campaigns as existing vaccines are likely to work, though less effectively, he says. “We’ll just carry on immunising until we get a vaccine that works better.”

The success of mass vaccination campaigns around the world are essential to economic recovery, particularly in emerging markets, which with the exception of China, were hit harder by the pandemic last year than advanced economies.

The World Bank has forecast that the global economy will grow by 4% this year after a contraction of 4.3% in 2020.

But the variables in the near-term remain “highly uncertain” and a continuing rise in infections coupled with a delayed vaccine rollout could limit expansion this year to just 1.6%, it said in a statement released in early January.

In SA’s case, the urgency is acute as scientists are increasingly predicting another resurgence of infections in the country as winter sets in and people begin to gather indoors – as has been the case in Europe. “It is quite likely that we will see a third wave and probably even a fourth in the course of the year,” says Abdool Karim.

“These waves will occur whether or not we have a new variant, but if we have a new variant – which I think will be likely – then the third wave will be much more severe.”
Prof Salim Abdool Karim, epidemiologist and co-chair of SA’s Ministerial Advisory Committee on Covid-19.

SA’s second wave of infections, which began in December, was bigger than the first because it was driven mainly by the new SA variant, which is 50% more infectious than the original one.

Mass gatherings by celebrating matriculants were identified as the main “superspreader” events, and the country had 41 117 recorded Covid-19 deaths by 25 January – up from 28 469 at the end of December.

Expensive blunt instruments

Professor Alex van den Heever, chair of social security systems administration and management studies at the University of the Witwatersrand, says until enough people are vaccinated, SA will need a permanent form of level 1-restrictions. But these have to be carefully thought through so as to limit economic harm.

“So far government has used blunt instruments instead of targeted ones to maintain control of superspreader events.”
Prof Alex van den Heever, chair of social security systems administration and management studies at Wits University.

These include blanket bans on tobacco and alcohol, which freed up hospital beds by reducing trauma cases, but according to

Van den Heever, cost the economy R35bn of lost tax revenue in 2020.

The alcohol industry is now in distress, with SA Breweries withdrawing R5bn of planned investment over the past 12 months and estimating that the bans in 2020 cost 165 000 jobs.

Heineken cancelled investment in a new R6bn brewery last year while Consol Glass withdrew plans to invest R1.5bn in infrastructure.

The tourism and restaurant industries are literally on their knees. Both took a global hit, but in SA, many of the restrictions placed on them to prevent widespread infections are seen as excessive.

SA lost an estimated net 1.5m jobs in 2020. Coupled with what is now an ingrained fear of the virus by much of the public, unemployment in these two labour-intensive sectors will continue to climb.

“We are in full support of adhering to protocols – but government needs to work with us to save jobs,”

Wendy Alberts, head of the Restaurant Association of SA said in a recent interview with the SABC. In the face of a curfew and an alcohol ban it is “virtually impossible” for any restaurant to survive, she added.

Tshifhiwa Tshivhengwa, CEO of the Tourism Business Council, said that it was vital that SA is viewed as a safe destination for international visitors, as domestic tourism will continue to suffer from the halt to corporate and government travel within the country.

“The world is going to be ready to travel and the last thing we want is that we are not going to be ready to receive them simply because our front-line staff are not vaccinated,” he said.

Growth?

Economists say the reimposition of adjusted level 3-restrictions at the end of 2020, together with the anticipated withdrawal of money for social support, is going to curb expected growth in the first quarter of this year. NKC senior economist Pieter du Preez predicts a contraction and forecasts growth of just 2% in 2021 – well below consensus of 3.5%.

The SA Reserve Bank raised eyebrows by increasing its GDP growth forecast to 3.6% from 3.5% at its monetary policy meeting on 21 January.

But it added: “New waves of the Covid-19 virus are likely to periodically weigh on economic activity both globally and locally. In addition, constraints to the domestic supply of energy, weak investment and uncertainty about vaccine rollout remain serious downside risks to domestic growth.”

Power shortages are expected to persist and even deteriorate in the months ahead, after the worst year of load-shedding on record in 2020. Energy analyst Chris Yelland says that government procurement of new generation capacity is unlikely to alleviate power shortages for the next two to three years.

At the same time, regulatory hurdles and red tape are preventing many private customers from generating their own power, even though this has been given the green light by government.

Herd immunity

The government plans to achieve the level of “herd immunity” against Covid-19 – which it believes will bring the virus under control – by vaccinating 40m people, or 67% of the population, by the end of this year. But the goal is seen as unrealistic by Professor Shabir Madhi, director of the Medical Research Council’s research unit for vaccines and infectious diseases analytics.

Abdool Karim believes that even only achieving the first two phases of the government’s plan – vaccinating frontline workers, the elderly, and people with comorbidities – would be enough to make a difference. Madhi and other medical experts say that this will not be enough to stop widespread transmission.

The government has been sharply criticised for not arranging to procure vaccines more quickly, but some analysts see credibility in its argument that forking out more than R2bn to pay for development of vaccines which may not work was too risky for its precarious finances.

Nonetheless, that would have given the country secure and cheaper access to some of the leading vaccines. At present, SA has been promised more than 30m doses either through direct deals with manufacturers or agreements with multilateral agencies, like the Covax facility organised by the World Health Organization and global vaccine alliance Gavi.

The first shipment of the AstraZeneca vaccine, seen as the most suitable for South Africa, was due to arrive in the country on 29 January and was set to be distributed by vaccine company Biovac, a public- private partnership.

But critics say details of how the vaccines will be administered are sketchy and will fail without the help of the private sector, which is being roped in to fund the rollout.

Mechanics

If a centralised procurement approach is pursued ‘behind a cloak of secrecy’ it will be vulnerable to corruption in a similar manner as tenders for personal protection equipment early in the pandemic, Van den Heever warns.

The price tag of the vaccines, together with money for the nurses involved, has been estimated at between R8.6bn and R16.4bn.

This pales into insignificance against the estimated R389bn in output lost to the economy last year and is seen by all as money which would be well-spent. President Cyril Ramaphosa has said the government will have to borrow more to fund the purchase of vaccines, which will worsen its already unsustainable financial burden. Tax increases are being considered, but economists warn that this would further erode SA’s shrinking tax base.

A redeployment of scarce budget resources is seen as the best way to fund the immunisation drive.

But as finances tighten, SA could move further toward austerity, which the Organisation for Economic Cooperation and Development has warned governments to avoid.

The group has also argued against the termination of state aid programmes to counter the impact of the pandemic, saying that this would worsen income equality, fuel social division, and spur a populist backlash.

Ramaphosa said on 24 January that the ANC has agreed the government should consider basic income relief to unemployed people who do not receive any state assistance, but that this would depend on the state of public finances and there should be a clear exit strategy on these grants.

In its October Medium-term Budget Policy Statement, Treasury said it aimed to stabilise government debt at 95% of GDP – seen as far too high for a developing economy – within five years. But even this will be hard to achieve after the crippling blow to public finances from the Covid-19 pandemic.

Read more
This article originally appeared in the 4 February edition of finweek. You can buy and download the magazine here.

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