South Africa’s economy wallows in deep recession as it battles COVID-19

South Africa (SA), Africa’s most industrialized economy, over the past five years have had its economic growth stood at an average of 1.5%, while its official unemployment rate was at 29%. The country's credit rating has been downgraded by major international credit rating agencies, including Moody's and S&P.

SA has been battling with a protracted recession for a long time now. In the last quarter of 2019, the economy grew by -0.6. This was followed by problems in the manufacturing and mining sectors, stagnant retail turnovers and low investor confidence.

According to countryeconomy.com, Gross Domestic Product of South Africa fell 0.5 in the first quarter of 2020 compared to the previous quarter. This rate is one-tenth of one percent less than in the previous quarter, when changed -0.4%. The year-on-year change in GDP was -0.3%, three-tenths of one percent more than the -0.6% recorded in the fourth quarter of 2019.

The GDP figure in the first quarter of 2020 was $69,094 million. South Africa has a quarterly GDP per capita of $1,315, less than the same period last year, when it was $1,341.

According to the African Development Bank group, South Africa being Southern Africa’s largest economy, was projected to contribute an average of 60% of regional economic output in 2020. However, the impact of COVID-19 on the South African economy is projected to trickle to the rest of the Southern African economies. Growth is now projected at –4.9% in the baseline case, mainly driven by the deep recession in South Africa.

The largest sector of the economy is services which accounts for around 73 percent of GDP. Within services, the most important are finance, real estate and business services; government services; wholesale, retail and motor trade, catering and accommodation; and transport, storage and communication. The remaining sectors are Manufacturing, mining and quarrying as well as agriculture.

The World Bank indicated that, South Africa has the largest number of confirmed cases of COVID-19 infections in the region, and strict measures to contain and mitigate the spread of the virus are weighing on the economy.

According to the trading economics, the GDP has contracted 0.1% year-on-year in the first quarter of 2020, following a 0.5% decline in the previous period and compared with market expectations of a 0.8% fall. Main negative contributions came from mining & quarrying (-4.5% vs -1% in Q4); manufacturing (-3.5% vs -2.6%) and construction (-5.3% vs -4.6%). On a quarterly basis, the economy shrank 2% in the three months to March of 2020, the most in a year, following a 1.4% contraction in the previous period but less than market expectations of a 3.8% decline.

The SA economy has been struggling with serious macroeconomic problems even before the outbreak of the coronavirus in December last year. The election of Cyril Ramaphosa as president  of SA in February 2018 came as a good news to the people of South Africa and many South Africans saw it as a “new dawn” for their country.

Commentators spoke of “Ramaphoria,” as the new president who sought to revive the spirit of idealism that informed the early days of post-apartheid South Africa in the 1990s, and to engineer a definitive break with what he acknowledged were “nine wasted years” under Zuma.

The world politics review indicated that even before the COVID-19 pandemic sent South Africa spiralling into an even deeper economic crisis, there was a growing sense that Ramaphosa was mismanaging the political capital he accumulated in 2018. He has not delivered on a ‘promised package of economic reforms’, nor has he been able to ‘turn the tide of corruption’ in the ruling African National Congress party, as he pledged to do in his inaugural address.

COVID-19 ERA

The first case of coronavirus in SA was recorded on Thursday March 5, 2020. Currently, data from the Worldometer on AUGUST 27, 2020 put SA’s total coronavirus cases at 615,701 with 13,502 deaths. This puts SA on 5th position in the world ranking of total number of coronavirus cases.

The South African economy, which was already struggling before the pandemic due to slow growth and high unemployment, faces further headwinds as policymakers attempt to mitigate the damage of COVID-19. Before the pandemic struck, the unemployment rate in the first quarter of 2020 was 30 percent, and South Africa was in its second recession in two years.

According to Brookings, following the outbreak of COVID-19, 1 in 3 income earners in February had lost their source of income by April. Half of these people were permanently laid off. Laborers already more vulnerable than others have been disproportionately hit as well: Two-thirds of the net jobs lost belonged to women, while manual workers were almost three times more likely than professional workers to be laid off.

Although, South Africa saw an increase in Foreign Direct Investment (FDI) inflows to $1.74 billion in the first quarter of 2020, that number seems to not have told the whole story, as the $1.7 billion came from PepsiCo’s countercyclical acquisition of Pioneer Food Group, one of the largest South African companies in an industry slumping in the face of dry weather conditions.

Meanwhile, private capital has been leaving the country at a rapid pace. Nearly $6 billion exited the economy in the first quarter, compared to an entrance of $558 million the previous quarter.

Non-residents sold nearly $4.5 billion in bonds in quarter one, causing interest rates on 10-year sovereign bonds to peak at more than 12 percent in late March, though the rates have since returned to their pre-pandemic levels. According to Reuters, experts believe that South Africa’s Reserve Bank may cut interest rates for the fifth time in 2020 as soon as next week, which could broaden appeal for sovereign bonds.

Notably, the country is also experiencing a mass migration from its cities to more suburban and rural areas. From late March to late May, approximately 15 percent of South Africans (5 million to 6 million people) changed residences. Many migrants have returned to their home villages, which has placed stress on the food security and income their families are able to provide. Food insecurity was already on the rise: In a recent survey, 47 percent of respondents in South Africa indicated they could not afford enough food in April. A government unemployment program targeting 15 million people had paid only 600,000 by early June.

South Africa’s headline consumer inflation quickened to 3.2% year-on-year in July from 2.2% in June, data from Statistics South Africa show. On a month-on-month basis, the consumer price index was at 1.3% in July from 0.5% in June.

To minimize the economic impact of COVID-19, South Africa introduced various fiscal and monetary stabilization measures such as direct cash transfers to households and businesses through a $26 billion (€23 billion) recovery package.

There was also a ban on the consumption of alcohol and tobacco in south Africa during the lockdown. The ban on alcohol has since been lifted, but selling and buying tobacco still remain prohibited. Authorities have cited health reasons for the ban, but human rights groups and economic experts say it will have dire consequences for the already-faltering economy.

An economic expert in SA, Rossouw, indicated that the ban on legal tobacco sales pushed the cigarette trade into the hands of illegal cigarette manufacturers and smugglers. As a result, the government now loses billions in taxes revenues while smokers pay for expensive illegal tobacco products, particularly cigarettes.

Establishment of Infrastructure Fund

A partnership between the National Treasury, the Development Bank of Southern Africa (DBSA) and the newly established Infrastructure South Africa have partnered to make the Infrastructure Fund a reality. This is a fund that will be used to fund the gap in infrastructure investments. A total of R100bn (about $5.8bn) have been made available two years after President Cyril Ramaphosa announced the establishment of an infrastructure fund.

The support from the Infrastructure Fund will include blended co-funding, capital subsidies, as well as interest rate subsidies and government guarantees. The government has earmarked R100bn over 10 years, with the first R10bn provisioned in the February national budget.

Health workers threaten strike

The nation's largest union, Nehawu, has threatened a strike as healthcare workers face inadequate supplies of protective gear, and public service employees demand their salary increase for 2020. This comes as new studies on the impact of lockdown on the economy show rising joblessness and debt.

The City of Cape Town also blamed the pandemic for the delay of several projects, with nearly U.S.$27.7 million to be allocated over to the City's 2020/21 adjusted budget.

The National Education, Health and Allied Workers' Union (Nehawu) believes the government's response to Covid-19 is putting frontline workers at risk and it's prepared to go on strike to protect its members, even if it disrupts treatment at healthcare facilities.

According to Health Minister Zweli Mkhize, as of 4th August 2020, 240 healthcare workers had died due to Covid-19 and 27,360 had been confirmed to have contracted the virus. Nurses made up the majority of cases, accounting for 52%.

The combine effects of all these challenges facing the SA economy makes it very difficult to envisage when these challenges will be surmounted. It will require a collaborative effort from the government and the citizenry to help lift this fragile economy out of the recession.

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