RYK VAN NIEKERK: The national lockdown to combat the spread of the COVID-19 virus will have a dire impact on the South African economy. Some analysts expect the economy to plunge into a significant recession with some predicting the economy to shrink by as much as 7%. Nazmeera Moola, she’s head of SA investments at Ninety One joining me now. Nazmeera, Thank you so much for joining me. Many countries around the world have announced significant stimulus packages to support businesses and their economies. The South African government has only announced some relief measures but not an actual stimulus package. Are you worried about this?
NAZMEERA MOOLA: I am Ryk, I think that I’m increasingly starting to see COVID-19 as more of a natural disaster, I mean a catastrophic natural disaster on a large scale rather than a financial crisis. What governments around the world are trying to do is stop the natural disaster evolving into balance sheets and financial crisis and that’s why the stimulus is so important. South Africa hasn’t made that link yet, partially because our fiscal situation is already very constraint.
RYK VAN NIEKERK: So what would you like to see?
NAZMEERA MOOLA: Well, I think we are going to need extra spending on some current expenditure and that’s for health care, for equipment, for protective gear, for healthcare workers. Also for some very temporary increase in social welfare grants because we already starting to see the impact of lost wages on people in townships where you have people unable to buy food at this point in time and that’s not a sustainable situation. So that’s part of it, but I would hope that the bulk of the money is spent on maintaining South Africa’s productive capacity going forward because it’s really important that we keep as many jobs as possible through this crisis. Otherwise, we’re going to have ongoing problems with things like food security and in order to do that, we need to support businesses, particularly small and medium businesses, which employ almost half of South Africa’s workforce
RYK VAN NIEKERK: We would need money for that, the US has announced packages North of 2 trillion US dollars. In Europe, we’ve seen hundreds and hundreds of billions of euros and pounds being made available to economies. South Africa does not really have the fiscal room to actually provide significant financial support. How do you see government putting together a package like this?
NAZMEERA MOOLA: I think it’s about finding the money in the short term and then making sure we can deal with it in the medium and longer-term. So it’s two different steps in the process and ultimately in the longer term, you want to finance the side of the local bond markets. We have deep and liquid local bond markets, but in the short term, there isn’t that capacity to absorb the amount of issuance that’s going to be needed in the local bond. So I think we’re going to have to look externally for some support. Whether that is the new development bank, there’s already $1 billion being talked about from them or the world bank, bilateral loans, whether that’s China or there may be other parties in the mix, but the IMF has to be a consideration at this point in time. If we want to protect our productive capacity and our jobs, we need money to support businesses and I would hope that the government is willing to explore all sources and let go of some of the ideological concerns that have previously held them back.
RYK VAN NIEKERK: Indeed, but such a support program should focus exclusively on fighting the negative impact of COVID-19 it should not form part of the bigger or broader government spending budget. Do you think that is appreciated?
NAZMEERA MOOLA: I think there are some parts of government that have a very strong understanding of that. You know the risk is that you have targeted measures that either become recurring expenditure, which we can’t afford or mixed up in the overall budget. So it’s really important that you have a ring-fenced COVID-19 budget that is spent in a finite time period and those expenditures are not recurring because we certainly can’t afford that.
RYK VAN NIEKERK: Absolutely. How much money do you think government needs to throw at this problem?
NAZMEERA MOOLA: How long is a piece of string? I think it’s quite difficult. What we end up doing is making some sort of plausible estimates. So if we look at what developed markets have done, we’ve seen numbers from between 10% and 15% of GDP. The UK, once you add up some of the new emissions are heading towards 20% of GDP rapidly. If you look at what emerging markets have done in general, much smaller packages that look like more like 3.5%, 4% of GDP. So a starting point for South Africa would be 2% of GDP, which is R100 billion, which is what I think is needed on a stimulus side. It’s also worth bearing in mind too that given the problem in growth this year, you’re going to have a further R200 billion shortfall in revenues we estimate. So, separate things but worth bearing in mind as we think about funding.
RYK VAN NIEKERK: R100 billion is a lot of money, especially if you don’t have it. What role do you think the private sector will play putting such a plan together?
NAZMEERA MOOLA: I think the private sector in South Africa in terms of the private sector savings industry and banking industry is trying to figure out how they play a role in supporting South Africa supporting South African business through this period. And you already see South African fund managers, large owners of South African government bonds and I don’t think that’s going to go away, but in terms of supporting businesses through this period, the banks are looking at innovative ways on how to do that. The US treasury has a concept where they provide a first-loss tranche into funding that the banks than on-lend or they used their own capital over and above that. So I think there are ways we can deal with this in that way and ultimately I think in South Africa you could look to issue something like a COVID-19 bond with perhaps some special conditions. Maybe tax-free allows the treasury to issue at a much lower interest rate that would also help fund this. Ryk, I’m also not naive to believe that at some stage there’s going to be some tax impacts of this. We’re going to have to raise taxes in order to fund this at some points in time. I just think trying to do it now in the middle of this crisis is probably not the best timing, but at some point, that will also have to come into play.
RYK VAN NIEKERK: Government does not only not have money, but it also does not have time. This needs to happen quickly because the need to support businesses is immense at the moment, especially due to the impact of the lockdown on economic activity. How much time do you think government has to actually get this money and make it available to the economy?
NAZMEERA MOOLA: I would have said if you asked me the question at the beginning of the lockdown and had a month, which means that I’ve got about a week left, but I think probably another month or six weeks if they actually want to save jobs in the longterm because ideally what we’re seeing in China at the moment is an economy bouncing back faster than I had expected. The GDP number that came out this morning was still pretty awful – 6% but what we are expecting is overall bounce back to be relatively strong because jobs remained intact. That’s exactly the opposite to what we’re seeing in the US at the moment where you’ve had three weeks in a row of the largest unemployment claims they’ve ever seen. South Africa unfortunately I think is falling into the US bucket. I reckon we’ve already lost about a million jobs and we need to prevent the loss of more, which means actions sooner rather than later.
RYK VAN NIEKERK: The reality is that the longer we wait, the bigger the damage will be and the deeper the recession will be. I think another month that’s maybe even pushing it.
NAZMEERA MOOLA: Unfortunately that’s true. Which is why we get back to this fact that we need bridging finance. We ultimately want to fund this out of the local bond markets, which means that the government needs to create the conditions for better growth will, in turn, mean that confidence in the local bond market will increase because there’s confidence in terms of future revenue growth of SA inc meaning the South African economy and its ability to raise taxes locally. That requires an improvement in the longterm growth trajectory, so all those structural reforms that we’ve been talking about that the treasury included in their discussion documents published in late September last year need to be implemented rather than just talked about. We need to move into implementation phase during this lockdown and that’s really important if we can do that, that will create the confidence about longer-term growth, which means that a South African 10-year bond yield that 600 basis points above short yield become really attractive to international investors as well as local investors because they have confidence that ultimately the governments will be able to repay its debt. After all, growth looks more certain.
RYK VAN NIEKERK: How do you think this will play out? Do you think we’ll be able to get our ducks in a row to be able to implement such a plan sufficiently quantum wise as well as quick enough to actually make a difference to the magnitude of the recession we will see this year?
NAZMEERA MOOLA: If you’d asked me the question two months ago, I would’ve said no because the internal squabbling and lack of coherency within the ruling party that we’ve seen over the last several years I think would have ruled it out. However, the government that we have seen in action over the course of the last month dealing with this crisis has been fantastic to watch. And if that coherency can translate into economic policy, then I think it’s possible to do so. If President Ramaphosa can take this momentum that he’s gained in dealing with COVID-19 and shifted to the economy, yes, I think it’s very possible to do, but that’s what we need to see happen. And if we can do that, I think there’s been an increase in competence in this government through this horrible crisis that can be translated into positive economic momentum going forward. If we can move from dealing with the health crisis to the economic one.
RYK VAN NIEKERK: Yeah. I think one of the biggest structural problems we have is a lack of confidence, especially business confidence levels in relation to a belief that government can actually affect the structural changes we need. And now it seems like the president is actually prepared to make those changes and hopefully, that can flow through to other areas of the economy and, and maybe that is the big positive of all of this.
NAZMEERA MOOLA: No, exactly, and also the other positive that comes out of this is you’ve seen business and government working together in a very close space over the course of the last month. Coherency there is much better than anything we’ve seen in the last 10 years. Jacob Zuma’s government destroyed trust between the public and the private sectors. There’s been a massive rebuild over the course of the last two years in general, but certainly in the last month.
RYK VAN NIEKERK: Nazmeera thank you so much for your time today. That was Nazmeera Moola, she’s head of SA investments at Ninety One.
Brought to you by Ninety One.