COVID-19 THWARTS ECONOMIC RECOVERY PROSPECTS IN SOUTH AFRICA

COVID-19 THWARTS ECONOMIC RECOVERY PROSPECTS IN SOUTH AFRICA

South Africa, Africa’s most industrialized economy has for over a decade been characterized with slow growth with rapidly rising debt levels even before the outbreak of the novel corona virus.

The economy did not fare well during the last quarter of 2019 with a growth rate of -0.6. This was followed by problems in the manufacturing and mining sectors, stagnant retail turnovers and low investor confidence. Based on the poor performance of the various sectors, most of the forecasts for 2020 have predicted slower growth rates in the economy. Several economists have predicted a recession in the south African economy due to successive negative growth rates recorded in second quarter of 2019. According to these earlier forecasts, the negative growth rates was expected to continue at least to the first quarter of 2020. For now, it is clear that these negative growth rates will continue even beyond 2020.

The International Monetary Fund (IMF) predicts that south Africa will experience a sluggish growth in 2020 below the population growth rate in the sixth consecutive years running. Earlier forecast of the SA economy by the IMF indicated a growth rate of 1.1% and 1.4% for 2020 and 2021 respectively.

However, the IMF has revised downwards the growth rate for 2020 and 2021. According to their forecast the SA economy will be growing at 0.8% this year (2020) as against a previous forecast of 1.1%. Growth rates for 2021 have also been revised downwards to 1.0% as against an earlier prediction of 1.4% growth.

South Africa’s economy is forecast by the country’s central bank to contract 7% this year as a result of the coronavirus outbreak and the loss of the last investment-grade rating on the nation’s debt.

COVID-19 Era

The novel Coronavirus originated from the Wuhan Province of China in December 2019. It began spreading rapidly in China and to other parts of the world through the movement of people in early 2020. A study conducted by Ramelli and Wagner (2020) showed that the health crisis transformed into an economic crisis which was amplified through financial channels.

However, the severe social and economic effects of the coronavirus crisis was felt through the imposition of movement restrictions in many African countries. Some restrictive measures that were imposed to control the spread of coronavirus include: restricting non-essential activities, closing schools and universities, encouraging people to stay home, the lockdown of entire cities, requiring essential businesses to run skeletal operations and employees working from home. These measures inevitably affected economic activities in African countries, and policy makers had to use economic policies, both fiscal and monetary policies, to mitigate the negative effects on the economy.

Empirical studies such as Haleem et al (2020) have also shown that COVID-19 has affected day to day life and is slowing down the global economy. They argue that the economic effects of coronavirus include: the slowing of the manufacturing of essential goods, disruption of the supply chain of products, losses in national and international business, poor cash flow in the market, significant slowing down in the revenue growth.

In the context of the south African economy, the outbreak of the coronavirus has affected several sectors of the economy as well as various economic agents. It is sad to note that all these downwards projections were made even before the outbreak of the novel corona virus. The Africa Research Bulletin in an article published on 15 May 2020, said

 

“The collapse of the global financial markets, the tanking oil price, and the threat of a major global economic recession have radically altered the backdrop to South Africa's economic woes which were heading for a deep and protracted recession even before the Covid‐19 pandemic”.

 

It is now clear that the outbreak of the COVID-19 has worsened an already struggling SA economy and may speed up the recession process.

COVID-19 since its outbreak, has stifled economic growth globally and has affected businesses and lifestyles of individuals. South Africa is one of the hardest hits by the COVID-19 pandemic in Sub-Saharan Africa. As at Saturday June 6, South Africa had 43,434 coronavirus cases with 908 deaths. The measures put in place by the South Africa government to reduce the spread of the pandemic were national lockdown, ban on social gathering, ban on alcohol consumption among others. Curtailing movements of people and closure of businesses have had dire consequences on the economy.

The SA government despite a recession and huge public debt, has set aside millions of Rands for businesses and workers affected by the shutdown. The president and all his ministers took a one‐third salary cut for three months and donated the money to the country's virus solidarity fund. There are also individual donations to the SA government to help tackle the pandemic. For instance, the Africa Research Bulletin issued from March 16th–April 15th 2020 indicated that South African billionaire businessman Patrice Motsepe on March 28th pledged Rand 1bn (US$57m) to help fight the pandemic.

President Cyril Ramaphosa has set aside $30billion (500 billion rand) as a relief package to mitigate the impact of the pandemic on the economy. About 20% of this money is earmarked for the payment of unemployment benefits and social grants for the poor and vulnerable.

The Congress of South African Trade Unions has called for domestic revenue mobilization from both private and public sectors. Blomberg on the 5th of June 2020 said that an alliance between South Africa’s ruling party and labour unions is pushing for the mobilization of domestic pension funds to drive economic growth and urging caution about borrowing money from international financial institutions.

While South Africa has shunned the use of funds from institutions such as the International Monetary Fund in the democratic era, labour groups have now backed the government’s approach to the lender to seek $4.2 billion from its Covid-19 relief facility.

Financial Sector

In the Financial Sector, there was a decline in stock prices in the Top 40 Index in March following the announcement of coronavirus cases in South Africa. The Johannesburg Stock Exchange Top 40 Index, many of which have exposure to China, slumped 3.7% on the 24th of February as investors began to consider short-selling strategies.

Impact on Tourism

In the tourism sector, tourism to South Africa fell by about 80 percent following the COVID-19 outbreak, and the situation further worsened when a nationwide lockdown was enforced in South Africa.

Labour Union Unrest

The finance minister of SA, Tito Mboweni announced plans to slash the public wage bill by R160 billion over the next three years. During the Budget speech, Treasury proposed cuts to the public service wage bill of R37.8 billion in 2020/21, R54. Billion in 2021/22, and R67.5 billion in 2022/23.This comes after an earlier promise by President Ramaphosa that government would not cut jobs.

However, this did not come as good news for labour unions who indicated that there were no negotiations between them and the Finance Minister before that decision was made. According to the President, wage bill savings will be as a result of lower wage growth but not job cuts. This is one of the measures the SA government want to take to reduce public sector wage and save some money for the economy.

However, failure by the government to fulfil the agreement of a wage, five public sector wage unions have sent the SA government to court in an attempt to force them to pay. To many south African citizens, the decision not to pay wage increments is in the right direction since the country is still battling with the macroeconomic crises created by the pandemic which has exposed millions to hunger.

The budget deficit and public debt are expected to sky-rocket during the outbreak of the coronavirus. Azar Jammine, director and chief economist at Econometrix, in an interview with fin 24, said

“Without public sector union’s support or restructuring of state-owned entities, SA’s budget deficit will skyrocket, and so will the public debt, to the point that even Moody’s will not be able to keep the country in investment grade”

Rising household debts

Whereas the SA economy is facing huge debt crises, the individual consumers were also facing serious debt servicing issues even before the outbreak of the coronavirus. This according to fin 24 is getting even worse during the outbreak of the virus. According to the chief operating officer of DebtBusters, Benay Sager, South African consumers were taking on more debt to supplement incomes, even before the lockdown. The debt situation of households will become worst during the outbreak of covid-19 because some breadwinners might have had their salaries slashed or some might have lost their jobs entirely. Londiwe Buthelezi said in an article titled;

“SA households weren't coping with debt even before lockdown - and it's getting worse” said,

“The problem is that before some households' incomes got reduced by the lockdown, they were spending 64% of their take-home pay on average to repay all their monthly debt instalments. Low-income-earners taking home less than R5 000 a month coughed out 71% on average”

According to DebtBusters, household debt crisis stems from the fact that nominal salaries and wages in SA increased by just 1% between 2016 and quarter one of 2020 while inflation shot up 19% over the same period.

South Africans required 64% of their net income to service their debt every single month and also had debt to income ratio of 114% on average – those earning a net income of R20,000 or more had a debt to annual income ratio of 142% – which is not sustainable.

The Regent University College of Science and Technology has denied reports suggesting that the school has been auctioned to defray a debt owed Obokom Civil Engineering Limited.

The University in a statement, however, admitted that it had to fulfil some financial obligations towards the construction company.