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.
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.
“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.
“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.
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.”
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.”