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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