We are living in uncharted territory filled with uncertainties. There are currently just under 500 000 Covid-19 cases and just over 21 000 deaths globally. Beyond the deaths and human suffering, the global economy has been devasted and a contraction is expected in 2020.
In the past two months, investors have sold off more than $80 billion in stocks and bonds from emerging markets – the largest sell-off on record, and three times that of the global financial crisis in 2008.
In response, governments have applied a combination of approaches in order to limit the damage caused by this virus. These include aggressive easing of monetary policy and fiscal packages to expand healthcare provisions, provide additional unemployment insurance, defer tax payments and monthly bank repayments, protect payrolls, provide additional unemployment insurance and avert unnecessary bankruptcies.
The challenge for many emerging markets is the lack of fiscal space to release fiscal bazookas that have been unleashed by the developed world. The European Central Bank unleashed an audacious Pandemic Emergency Purchase Programme to expand its asset purchases by €750 billion over the next nine months, and the US Senate passed a $2 trillion Coronavirus Stimulus package, which is almost 10% of the US GDP, 70% of the Indian economy and bigger than the South African economy. Most emerging and low-income countries rely on foreign income from tourism, commodity exports and remittances, and as activity has halted, these economies will sink.
A necessary lockdown
After a two-day meeting with his cabinet members, President Cyril Ramaphosa announced that the country will be in lockdown as from midnight 26 March 2020. The lockdown was necessary given the exponential increase in COVID-19 cases in the country. Countries such as China and South Korea have shown that a complete lockdown can flatten the curve of infections.
The president announced that all South Africans should remain at home except for essential services, which include police and security services, health workers, emergency personnel, essential banking services, laboratory services and power, water and telecommunications services.
This means a large section of the economy will be unproductive and a great concern is whether many companies, especially the informal, small and some medium-sized entities will recover post coronavirus.
The government has put some measures to help fund those impacted financially by the virus. These measures include the Solidarity Fund, where contribution from the public, organisations and businesses will be used to support businesses affected by the lockdown.
Financial assistance for the informal sector will be provided by the Small Business Ministry and funds from the IDC to the amount of R3 billion will help support the manufacturing sector. Banks have stepped in to assist their clients by deferring monthly payments.
People who earn less than R6 500 a month will get a wage subsidy of R500 and tax-compliant businesses with a turnover of less than R50 million will be allowed to delay 20% of their pay-as-a-you-earn liabilities over the next four months. These are some of the efforts put together after a consultation between the president and business.
On the monetary policy side, the SARB has done well, so far, in providing the much-needed liquidity to stabilise the economy.
After over 40 central banks had cuts rates since the beginning of 2020, with some central banks such as the Canadian central bank and the Fed having cut interest rates twice in March after holding emergency meetings, expectations for a deep cut in interest rates grew. At its MPC meeting on 19 March, the SARB cut rates by 100 basis points, the largest cut since May 2009, in an attempt to quell the markets and inject liquidity.
Usually, a cut in interest rates has a corresponding effect on the bond and swap curve; however, the most recent 100bps cut in interest rates led to a rise in market rates. This implies that lower interest rates did not had the desired effect of easing financial conditions and funding costs.
When bank funding remains tight due to the shortage of cash, bank lending is limited. The coronavirus panic has led to outflows from emerging markets as they are perceived to be risky assets. Investors are selling emerging market bonds for cash and the high percentage of foreign ownership in South Africa’s bond market results in a volatile bond market. Bonds and swaps at current levels typically attract buyers given the attractive rates; however, there haven’t been enough buyers. As bonds sell off, margin calls have escalated, leading to asset managers having to access cash to meet those margin calls. This, in turn, has led to the selling of equities, gold, longer-duration fixed income and futures position.
On 20 March 2020, the SARB announced measures to enhance liquidity in the local market by extending the size and pricing of its liquidity management policies. The SARB also changed the frequency of auctions in an attempt to provide some relief. This was a conservative move which signalled that more will be done. On 25 March, the SARB announced that it will be buying government bonds in the open market to provide liquidity in the market. The amount of government bonds to be purchased was not stipulated; however, the market responded positively, and bond yields recovered somewhat.
There's a cost
In the absence of fiscal space and some limitations to what the SARB can do, measures to flatten the curve will come at a cost. According to the UN’s trade and development agency, the slowdown in the global economy caused by the coronavirus outbreak is likely to cost at least $1 trillion. They expect a global GDP of under 2% and if the global economy contracts by around 0.2%, the economic cost is likely to be around $2 trillion. For South Africa, a recession is eminent in 2020.
Very few companies will come out the other side unscathed. Consumers will cut spending and demand will be adversely impacted. As most sectors will be affected, the number of corporate layoffs and possibly bankruptcies will increase.
With unemployment already at high at 29%, we are likely to see further increases in the unemployment rate and a growing number of people will be reliant on the state. The manufacturing sector has a global supply chain and China is one of the main suppliers of components for large industries. Business are also pulling back on orders for goods due to the impact of the spreading coronavirus. Global supply chain disruptions, the weak rand and disruptions on the production-side due to the government-imposed lockdown will negatively affect this sector. The tourism sector has been shut down because of government's travel ban, and reviving it may take some months, depending on how quickly the global economy normalises. The financial sector typically does well the when the economy is doing well.
Even though there is some support for the informal sector, many people do not have access to the internet to make an online application for funding and some may not be tax compliant and therefore will be reluctant to apply.
Short-term measures to help support the economy will need to be extended beyond the Covid-19 crisis, and given public funding limitations, the private sector will have to play a greater role than ever before in helping the economy to recover.
The decision to contain the virus by reducing economic activity will slow the progression of the virus and reduce the infection rate, but it will also impose a greater economic cost.
The human cost of not doing anything will be far greater. The reallocation of the Budget needs to be considered, as some sectors such as tourism and sports, arts and culture may not require their full financial year Budget allocation. The funding of new projects may also need to be reviewed. Post-Covid-19 policies need to focus on health and jobs.
A global agreement needs to be made to help recirculate outflows back to developing countries, but for South Africa, lessons should be learnt on the danger of running a large deficit.