In his address to the nation on Sunday, President Cyril Ramaphosa emphasised that the coronavirus is not just a health concern. It is a real danger to the country’s economy.
He emphasised that the state will be putting together a “package of interventions” of “various fiscal and other measures” to help the economy through this period.
“Policymakers around the world have in recent weeks been debating, coordinating, and implementing diverse policy responses to counter the negative effects of Covid-19 on their respective economies,” PwC economists Lullu Krugel and Dr Christie Viljoen point out in a note.
“Supply chain disruptions and reduced business activity are posing tremendous risks to economies large and small.”
Ramaphosa did not reveal any details in his speech, as these are still to be finalised in consultation with stakeholders including business and labour. However, it is likely that they will be similar to those implemented in other countries.
“Apart from providing fiscal and monetary stimulus, a wide variety of targeted relief measures are under discussion in many countries of the world,” Krugel and Viljoen note. “In the USA, for example, a temporary expansion of paid sick leave and a temporary payroll tax cut were being debated. Provisions under discussion in Italy include helping workers who are facing temporary lay-offs, a guarantee fund for loans to SMMEs, and compensation to firms whose turnover has plunged by over 25%, as well as a moratorium for bond repayments. Relief measures in China include reductions in employers’ required social insurance payments, lower electricity fees, and Vat waivers.”
As the table below shows, governments have started to implement a range of measures to mitigate the economic impact of the virus. These fall into three broad categories:
“The priority for South African policymakers should be twofold,” say Krugel and Viljoen. “One issue is to ensure that the outbreak is contained as much as possible. A second challenge is to ensure that neither the shock it is giving to the economy – nor the economic policy responses aimed at alleviating it – push the already fragile economy off the cliff and into a long-term recession.”
A standard policy response to a stalling economy is to cut interest rates. This is to encourage more borrowing and spending.
In the US, the Federal Reserve cut interest rates by a full percentage point on Sunday to 0.25%. This followed a 0.5% cut in early March.
However, with interest rates in many economies already near zero, there is little scope for this in many parts of the world.
In this respect, South Africa is at an advantage.
“The South African Reserve Bank (Sarb) has more leeway to cut interest rates than its counterparts in the US, the UK or the European Central Bank,” note Krugel and Viljoen. “The local repo rate of 6.5% is joint 50th highest in the world out of 166 countries.”
Sarb has said for some time that lower interest rates are not a solution to South Africa’s growth problems, as a 0.25% cut would only deliver an extra 0.1% growth. However, even this would help.
“At this stage, a boost like that would be more than welcome,” Krugel and Viljoen suggest. “There is no real risk to the inflation outlook from cutting interest rates – there is no demand-pull on consumers prices at the moment.”
The second big policy option is in the form of government spending. Around the world, governments are making money available to both fund interventions to deal with the pandemic, and to stimulate the economy.
This includes spending on medical supplies, additional test kits, and interest-free or low-interest loans for small and medium enterprises that are likely to be most affected.
“Unfortunately, a major fiscal stimulus package is not an option for the South African government,” point out Krugel and Viljoen.
“Finance Minister Tito Mboweni, in his budget speech on February 26, indicated that strain on the fiscus will result in the country seeing its largest budget deficit (as percentage of GDP) in three decades during the coming 2020/2021 financial year,” they say.
The government can’t, however, avoid some degree of spending, illustrated by its decision to declare a national state of disaster.
“This includes additional resources for adequate health and testing facilities, and other prevention, containment and mitigation measures,” say Krugel and Viljoen. “Redirecting funding through existing budget line items would be preferable to increased borrowing.”
The final alternative
The South African government does however also have a third option, which is potentially even the least costly: economic reform.
“South Africa is already aware of the potential boost to the economy that microeconomic reforms could have,” note Krugel and Viljoen. “In the Budget Review 2020, the National Treasury augmented its baseline GDP growth forecasts with an upside scenario based on faster progress in the reform pipeline.”
The coronavirus may just present the best opportunity yet for Ramaphosa and Mboweni to push this agenda.
“Combined with monetary easing, the fast-tracking of economic reforms could lift local GDP growth by around 0.3 percentage points over the coming year,” Krugel and Viljoen argue.
“This will be a welcome boost: forecasts for growth in 2020 are dwindling as the Covid-19 impact deepens. The Sarb will publish its latest economic growth projections on March 19 and the numbers are unlikely to be encouraging. A combination of monetary and economic reform actions could improve the short-term outlook somewhat.”