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SA economy could crater up to 10% this year

Is this a financial reset? All we know is the recession will deepen.
The sacrifice of liberties that comes with greater state intervention in the economy is easier during a crisis. Returning those freedoms is then the challenge. Image: Dean Hutton, Bloomberg

Last week Capital Economics forecast a 2.5% contraction for the SA economy this year as a result of the impact of Covid-19. This was before President Cyril Ramaphosa announced a 21-day lockdown and the mass closure of businesses. It now seems the 2.5% contraction is on the optimistic side.

Russell Lamberti of ETM Analytics believes a countrywide lockdown in the midst of a global financial and economic crisis could shear 10% off economic growth for the year. “With a countrywide lockdown, GDP could contract by 10% or more this year, and we won’t easily recover from this once the shutdown is over,” says Lamberti.

“What is more concerning to me than the virus itself is the reaction to it, which could be worse than the disease. The whole world is going into shutdown, and countless businesses will close their doors forever, leaving millions out of work.

”What concerns me is that central banks everywhere are then going to resort to the same prescriptions they have adopted for decades and engage in rampant money printing. I have strong doubts that it will work, and could actually make conditions far worse.”

Whole segments of the economy at risk

Dawie Roodt of the Efficient Group recently wrote that the economy could contract 1.8% this year, but could just as easily shrink by 2.5% or even 3% as the impact of the coronavirus lays waste to whole segments of the economy. The first to be hit will be restaurants, hotels, airlines, hospitality and the retail sector.

Barely a month after Finance Minister Tito Mboweni delivered his budget speech and bravely forecast economic growth of 0.9% for the year, those projections are now toast, with revenues to the South African Revenue Service (Sars) likely to massively undershoot the R1.54 trillion target for the current fiscal year.

Clearly, there is no compass to guide us out of this disaster for the simple reason that a countrywide lockdown has never happened before.

In his address to the nation on Monday, Ramaphosa announced plans to buttress businesses and employees from the impact of the virus. Some of the details are sketchy and it will take days and perhaps weeks before cash reaches the areas where it is needed most.

The South African Reserve Bank will provide liquidity to the banking sector, while the banks are expected to announce debt relief measures in the coming days. Standard Bank has already announced payment relief for students and small businesses that are up-to-date on their payments and in good standing.

There is widespread fear of large-scale default on loans as employees, business owners and the self-employed suffer loss of income. This is reflected in the 40-50% plunge in most banking share prices this year, an astonishing drop for a sector that was widely touted as relatively cheap at the beginning of the year when prices were much higher than they are now.

Banking staff are themselves fearful for their jobs, as one executive told Moneyweb. Corporate banking and deal making activity has virtually ground to a halt.

Deals that were ready to be signed a few weeks ago now look dead in the water, given the rapidly deteriorating cash position in companies.

Businesses that looked reasonably healthy two months ago may now have to go to government for bailout.

In the best case scenario, the 21-day lockdown works its magic and reduces the rate of virus infection. The real damage will occur in the second quarter of the year, says Roodt, with the possibility of recovery coming in the third and fourth quarters. But the reality is that the SA economy was already sick before the coronavirus struck.

In a less optimistic scenario, the lockdown does not work its magic and has to be extended. Then the economic impacts will ripple through until the end of the year, with companies permanently closing their doors, resulting in the loss of hundreds of thousands of jobs.

Modern Monetary Theory

This may be the point where Modern Monetary Theory (or virtually limitless money printing) is given a test run to support an ever growing queue of state dependents.

“Big money printing could include quasi-nationalisation of key businesses, perhaps even banks,” says Lamberti.

“What may be worrying about this is the sacrifice of liberties that comes with greater state intervention in the economy.

“People may be willing to give up their freedoms temporarily in the crisis such as this, but when the crisis is over, history tells us that these freedoms are not fully returned to the people. That said, I don’t think people are going to surrender their freedoms that easily to the government. There is going to be a big showdown with civil society.”

Government has mismanaged its accounts to the point where the budget deficit was likely to reach 7% of GDP even before the virus struck. Instead of cutting back on spending, it is attempting to spend its way out of trouble.

“Once the dust has settled, I think it will take the economy years to recover from the damage caused by the global and domestic policy reactions to this virus, and some of the damage in SA may be permanent,” says Lamberti.

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Source: ShareMagic

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When the Debt/GDP ratio and the budget deficit are high, when there are huge commitments for social grants and high wages in the overstaffed public sector, when the already bankrupt SOEs demand more guarantees and funding, when the ruling party depends on labour unions and BEE beneficiaries for support, when municipalities are bankrupt but keep on demanding rates and taxes, when communist dogma protects bankrupt SOEs and discards new competitive technology, when the state forces the private enterprise to correct the mistakes of the government by implementing an NHI, when corruption overtook religion as the national ethos, when the criminal justice system stands idle when criminals privatise profits while they nationalise the costs, then the bomb of financial destruction is primed.

A trigger is all it takes for that bomb to explode. Such a trigger is always some or other crisis that leads to a financial crisis. If it was possible for the IMF to defuse this bomb, then we would not have this explosive situation, to begin with. The IMF does not want to come near this thing because it is too unstable, too scary. The IMF will wait for the ANC to defuse the bomb, but they are the guys who built the bomb.

Sensei, the real welfare queens are corporate America, go and take a closer look at the amount of tax payer money they have devoured. What happens in the USA has a larger impact on our economy that what actually happens here.
When they snort coke in Houston you lose your hat in Clifton, as the saying goes.

You are right of course, but they enjoy the “exorbitant privilege” of printing the reserve currency of the world. They export their inflation or deflation to every nation that needs that reserve currency to buy oil or to service dollar-denominated debt. They escape the consequences of money printing by exporting it. We, on the other hand, have nowhere to go.

True, but the US has a substantial financial cushion, that SA doesn’t have. SA does not have financial cushion or a safety net.

On top of all the financial crisis that uncle Tito alluded to, we now shut down our economy and thousands will lose jobs while industry & commerce grind to a halt.

So when US sneezes, it can recover, but SA will go under.

The IMF has got a long wait if it’s hoping the ANC will fix the mess it has created.

Had i made racists remarks, or even unfounded idiotic comments i could understand my comments being deleted

However, i did nothing of the sort, but merely gave my 10cents worth and

MONEYWEB DELETES MY COMMENT!

Why??

so much for freedom of speech? you have stay in line of their narrative Mr Roux.

History, judging by the surge in economic growth (and long term strength) of those countries hardest hit during WWII, has shown that contrary to an all doom and gloom cynical mindset, real value (in the form of unified time and labour) and nation building, can turn a negative into a massive positive.

Only in countries where the free market and property rights were protected (& had a disciplined and technically strong workforce). That is why Japan and Germany rose again, workforce + free market + American capital. Those were the 3 elements of their resurrection – we have NONE. You’re argument is 100% incorrect. SA will not rise again but stagger forwards on the IMF’s back. Unless you think EWC, the NHS and plunging into the GEPF may do it?

Your scenario is not applicable to the current SA scenario.

While we are facing and enduring a lockdown, can we please have more positive articles. What we need are positive suggestions as how we can improve the situation. Let the profits of doom put away their crystal balls for a while at least.

Depending on the future course of the virus, it may well serve to ameliorate the unemployment problem.

There, will that do?

And ESKOM might have surplus power for decades to come.

Well said Henriques.

Quoting in the article all these analytical “non doer” companies with their own agenda as the predicted scenario is wrong and the effect can be just as bad as fake news. Ultimately they are predicting the future which they cannot do and like all of us they don’t know.

This virus has been around since the end of December and I cannot remember any of these guys predicting this when it counted in say January and warning people, up until say 10 days ago people were still travelling from SA to go to Virus hot spots.

Great idea

I’m positively concerned about the economy
I’m positively concerned that our country will be downgraded this week
I’m positively concerned about paying my expenses in April
I’m positively concerned that Corona might not go away after day 22
I’m positively concerned that the recession was not only caused by Corona
I’m positively concerned that the ANC does not share my positive outlook

I’m so positive i don’t know how to spell negitive

You are at the wrong address then. Try Fair Lady or Rooi Rose my brother. We come here for facts, not for fiction.

The realities of informal settlements dictate that this twenty-one day lock-down will fail. Your neighbour is 3m away. You share communal toilets with your neighbours. This precludes effective isolation. Measures that work in Europe and Asia, where people live in formal housing, cannot work in an informal settlement. So this lock-down is bound to fail, but with the side effect that it is also strangling the economy. The proverbial waitress with six people to support, is going to become destitute, while the virus continues to spread anyway.

Incitatus – you have a point, but how do you think the situation should be addressed (considering that this virus is a killer and not your everyday cold)?

Really good question for which there are not easy answers. However, the lock-down cannot work for millions of South Africans, and it is also these people who are the most vulnerable to a loss of income. The economic devastation caused by the lock-down will be long-term and in my opinion these 3 weeks will do much more harm than good, long-term. Large-scale job losses will cost the taxpayer billions in terms of UIF payouts and more and more grant recipients.

So I guess part of the answer is: why not rather spend those billions paying the private sector to establish emergency care facilities outside Alex and Diepsloot, like China did, to care for the many people who will require hospitalization, especially due to HIV and TB?

Deon, who told you that? Are you doing any personal research or relying purely on the usual culprits who have been caught enumerable time sprouting whatever lies the governments want you to hear. I find it extremely disappointing how over the last , say 20yrs so many people have suspended all critical thought and just fall into line no matter how obvious the lies are. Aldous Huxley had it more right than Orwell.

Deon, “this virus is a killer and not your everyday cold” So why has nobody died yet in SA?

The consequences of shutting down the whole economy is going to result in far more death and suffering, and for much longer, than the virus. There is very little in the media about the economic tsunami of gigantic proportions that this is going to cause.

Already the WHO has advised that the suicide rate is rapidly increasing and may soon overtake the number of deaths from the virus. In a country which has an serious problem of woman abuse can you imagine hundreds of desperate woman being sequestered with their abusers for weeks on end? The bloodshed and murder rate will increase. Already we have 57 murders a day in SA but no one has been isolated at home in case they get murdered. We have 39 deaths from road accidents every day but drivers are not prevented from driving. In SA the unemployment rate could well double.

Politicians are using this virus to further their agendas and the media is having a field day generating fear to maximise clicks. Trillions have been poured into the world economy which is already drowning in debt. Who, in his right mind would give more drugs to a drug addict? Who, in his right mind would throw fuel on a burning building? Who, in his right mind would dish out more drugs and fuel while simultaneously shutting down the economy?

Truly the world has gone mad, we have screwed up the future of our children and grandchildren with debt, debt that never gets repaid!

But, we are being asked to be positive. Ok, I am positive that the ANC will make sure to siphon off as much of the “lifeline money” they have miraculously found to help their buddies.

Even if, however unlikely, the lockdown at home level and the closing of borders becomes totally effective, as soon as these restrictions are lifted, SA will become re-infected from travellers from other countries that are infected, rendering the exercise useless.

This could mean that the restrictions, on border control at least, cannot be lifted until the virus is eliminated globally.

In real terms the ANC has caused a crater larger than that over the last 10 years.

There is a concept being debated amongst the academics at this time: Is the treatment more harmful or more deadly (economically & financially) that the affliction?

That is, will the lockdown do more damage than the virus? Comparing the likely severity of these ways.

And the other newspaper says Ramaphosa is doing a great job “leading”????????????????????????????????????????????????????????????????????????????????????????????????????

End of comments.

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