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How the economy could emerge stronger from Covid-19

If South Africa doesn’t waste a good crisis
The idea that when the money runs out, the ideology runs out may come into play. Image: Nadine Hutton, Bloomberg

As the number of confirmed Coivd-19 virus infections in South Africa continues to climb, and the stock market turmoil persists, it is difficult to look beyond the immediate crisis. We are in the midst of an economic event that has no precedent.

Read: Special report: How bad to markets expect this to get?

It is, however, important to maintain perspective.

“If you look at how much China’s industrial production fell for the period that it shut down, and you take a similar view across the world, I think this is going to be the most severe macro slowdown that I have ever seen,” says Peter Brooke, head of MacroSolutions at the Old Mutual Investment Group.

“I think the extent is going to be worse than everyone thought, and potentially the length will be worse than everyone thought. But it’s not forever.”

“It is a shock – an event – but we are getting massive monetary and fiscal stimulus, and it’s coming very fast,” Brooke says. “This is not the global financial crisis where we had massive overleverage in the financial system. We don’t have crazy excesses around the world. There are pockets of excess and they will be in trouble – there will be many companies and individuals that don’t come out of this. But the sharper the fall, the sharper the recovery.”

A new order

It is not, however, just the scale of the recovery that investors should anticipate. Given the scale of the disruption, the kind of economy that emerges on the other side of this crisis could, and perhaps should, be different to the one that entered it.

This is particularly the case in SA, where economic reform is so necessary. This crisis could open up the space for action in a number of areas that may have been a lot more difficult in a normal environment.

Read: Covid-19: How can government support the economy?

“There is a principle that says when the money runs out, the ideology runs out,” says Kevin Lings, chief economist at Stanlib.

“We have seen this in many countries – that when push comes to shove, you have to become a lot more practical and less philosophical in how you address economic issues.”

Perhaps most obviously, the government’s options with regards to the future of South African Airways (SAA) have been dramatically reduced.

SOEs

“One of the things that isn’t being recognised is the significant financial consequences governments are facing,” Lings says. “They will have to provide a lot more money, but they are taking in a lot less in taxes because there is less activity. That takes time to show, but it mounts up very quickly. And in South Africa it might accentuate the need for more practical reform, and one of those may well be around SAA. It will force some changes that perhaps we have been contemplating, but perhaps haven’t acted on.”

The airline announced massive cuts to its operations on Wednesday, and the chances of saving it are rapidly diminishing. What may have seemed a hard decision to some members of cabinet just a few weeks ago, is becoming much more straightforward.

Read: SAA cancels 162 flights due to coronavirus

A slowdown in economic activity would also give Eskom a little more room to address its maintenance issues, as demand will fall. This should see a reduction in load shedding and allow time for private sector participation in electricity generation to come online for when the economy ramps up again.

On the ground

The spread of Covid-19 may also lead to a rethink of how critical services are delivered. As a start, the government will be forced to properly address the country’s public healthcare system to avoid a serious health disaster.

“This will highlight the deficiencies in the public healthcare sector in terms of equipment not being available or not having enough staff or hospital beds,” points out Sanisha Packirisamy, economist at Momentum Investments.

“The government can take this healthcare crisis and turn it into something positive regarding better healthcare infrastructure and better communication to the public to address our very high disease burden.”

School and university closures may also lead to the development of creative solutions for teaching students that are not all in one place. These could be capitalised on even after the crisis has passed, potentially making education more accessible and effective.

“The quality of education is a big factor for South Africa,” Packirisamy says. “In a country where we are struggling with university capacity, this does give us a bit of a broader scope to think about how we enhance the productivity of a growing labour force through technology rather than suffering from infrastructure constraints.”

Pay freeze

Finally, Brooke believes there is a real opportunity for the private sector to take a leadership role on wages that would support reform in the public sector.

“For me, I think the biggest single message is that the whole country can’t take a pay increase,” Brooke says. “This is a time where the private sector can say that we would normally be retrenching, but let’s try to reduce job cuts by giving no one a pay increase.

“That creates the space for the public sector to say we are not increasing pay either, which they have to do.”

This would give the government some fiscal room for direct relief to the country’s most vulnerable citizens.

“We are going to need a strong social response,” Brooke argues. “For me that is food aid, or expanding social grants dramatically for a six-month period. But the money for that has to come from a wage freeze, because if you have a job you are okay relative to people who don’t.

“If large corporates come out and say we are giving zero pay increases and saving jobs, then public sector unions can’t say we want a 5% pay increase,” he says. “Especially if the money is used for food aid to the poorest of the poor.”

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The age old adage of what goes up must come down. Yet the world always recovers and so will we

Hopefully all this will be a wakeup call for Communist led ANC Government to cut the wage bill, abolish BEE and rethink EWC and the NHI

Knowing them they will do the exact opposite. Impose EWC, nationalise the private health system, implement NHI. Abolish BBBEE? not in a million years.

On the contrary, when (not if) the public health sector gets overrun with covid patients sometime during the next eight to ten weeks, chances are at least 50/50 that government will simply nationalise private healthcare services. Voila, NHI achieved.

Steve, now back to reality. The ANC will spin this as follows:
‘We have to implement the NHI immediately because this crisis has shown how our current privatised system cannot serve the previously disadvantaged properly.’
‘EWC needs to accelerate to provide more and improved living space for the oppressed so that diseases do not spread so quickly amongst them.’
‘BBBEE is now more important than ever because black people are the poorest and therefor suffer more in a crisis like this.’
Oaktree is absolutely correct.

I think the same – the ANC may nationalise private hospitals to cope with the virus then forget to un-nationalize them; conveniently. EWC at work.

SA is dead – irrespective of the effects of coronavirus.

I think you mean if we had a reasonable and rational government, everything would turn out rosey.

I’d like to believe that, yet some in the alliance were still talking about mass protests despite the probability of some of their members falling fatally ill. So I’m not holding my breath on that one. Maybe other countries perhaps?

Great article. We have some big opportunities that could emerge from this crisis

Agree on the assumption of rational Government and to add, this has not been the case leading up to this point and there is nothing to suggest this is going to change.

Great article Patrick. Some other thoughts on this.
1. Stimulating the economy and assisting now – government could release spectrum rapidly to allow for proper work from home/connectivity while isolated.
2. Energy crisis – pull out the stops on removing bureaucracy and get the emergency 2000 – 3000 MW in before Eskom has to start producing more electricity.
3. With the education for all around hygiene we may see a reduction in other communicable diseases.
4. Others must have thoughts in their fields as to what changes have been held up politically because labour/government/private sector havent worked well together?
5. This is the first time in years where I havent heard a single politician contradict his fellow party/cabinet/ other party member. Long may this last

Thanks Gina! You rock. I love your positivity. We will absolutely conquer this and emerge stronger and United. I have so many Billionaire friends who are waiting in the wings. They are so impressed with the presidency and they are contributing to the fund.

We always get these idiot small minded negative fools who can’t see further than their own backside.

And the public transport sector?

Taxi passengers are more likely to die in a road accident than from the dreaded virus.

I’m afraid Mr. Brooke, you are seriously mistaken that this crisis is not one of serious over-leverage. The massive over-leverage may not have caused the crisis but the secondary consequences of this crisis will be massive liquidity problems as a result of the mother of all credit bubbles – all $270 trillion of it not to speak about the $1 -1,2 quadrillion of derivatives. Hanging around is $12 trillion in outstanding margin calls. Where do you think this money is going to come from. The day of reckoning for the gamblers like your company and others who have been merrily gambling on financial markets all around the world, has finally arrived. You know, or should know that some people on the point of retirement has woken up this morning just to find that suddenly their pension is minus R1 to R2 million

London is absolutely screwed! Great way to exit Brexit. New Zealand is screwed. Catch a wake up!

The most telling part of this massive readjustment, in my opinion, is that institutions did not run for the traditional vestige of uncertainty- ie gold.

Instead they have dived into that ficklest of all mistresses- the dollar. In the meantime quantitative easing and proposed “strong social responses” (let us not call this communism, nor even socialism, comrades!) have reduced rates to sub-zero levels.

Also, despite the lifebuoy of a $60 futures price thrown to US oil miners over the midterm by the “trumped-up” Iran attacks over the New year, oil has now plunged below the $30 level. This flush (dare I say “dump”) of value draws strongly from the Trump economic plan and his aspirations for re-election

Cash flush investors will be wincing from the side effects of nil returns and fixed costs on their loot stash. This while dividends and yields in emerging and developing markets are mouth-watering more so and more so.

This is the grain of truth in the covid-19 situation.

The World has moved beyond isolationism and one-up-manship.

A strategy that does not accommodate the differing needs of developing nations alongside those of the developed in an integrated and fairly evolved way will always result in meltdown- physically and speculatively!

Carpe diem and rest assured there are always rewards for those who develop integrated, healthy, nutritious, fertile and energy-positive outputs using what they already have.

A restructure to the Real Truths of the emergent green economy and the Fourth Industrial Revolution is imminent and in progress

SARS and the anc are going to be hard pressed to garner their budgeted tax income, particularly from businesses whose profits are on the line!

Wonder how the commies plan to fill that gap?

So whilst everyone speculating, one practical tip to assist in handling the dire effects of COVID 19 – arrange with the China comrades to fly those prefabricated medical facilities they don’t need any longer to S.A. together with medical equipment, ventilators, test kids and appropriate medicine. It could be here and in operation within a week. Act now!

I expect a return to same old, same old as the virus abates over the coming months. I really and truly hope I’m wrong but let’s get real. The same rotten apples are in influential positions, unemployment is diabolical and no matter how much liquidity gets pumped into the markets, none of it is “real”. We’re all living on borrowed money, on borrowed time.

End of comments.

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