Thebe Mabanga
As the South African economy moved into lockdown, the government needs to put in place stimulus measures to not only help the economy through this wave of crisis, but also place it on a long-term footing for growth.
“The economic difficulties that SA faced before the coronavirus outbreak have just multiplied 10 times,” Pick ‘n Pay chief executive officer Richard Brasher said last week at Stanlib Conference where physical attendance was cancelled due to the virus.
On Thursday evening, President Ramaphosa announced a range of measures to help tide the economy over the coronavirus outbreak.
These include the R 1 billion solidarity fund and a R 3 billion industrial fund put together by the Industrial development Corporation and the Department of Trade and Industry to assist distressed firms.
They also include a R 200 million fund to assist small and medium-sized businesses as a dedicated fund to help firms in the tourism sector hit by travel restrictions.
There will be assistance form the Unemployment Insurance Fund (UIF) with the fund expected to explore more supportive measures using its vast reserves.
But all the measures announced, apart from commercial banks giving a payment holiday, are from government and its agencies.
It is unclear how the private sector will contribute apart from accessing aid.
What are private pensions, for example, to be used for?
The South African private sector once again shows itself to be a taker, without being much of a giver.
Major economies around the world have put in place stimulus measures to support business and workers through the crisis.
Countries such as the Unite Kingdom, United Sates and New Zealand have put in place stimulus packages.
In India, Prime Minister Narendra Modi is facing calls to introduce a basic income scheme and analyst estimates that the country can spend $ 18 billion to weather the storm.
Last week, Lawrence Wong, Singapore’s minister for national development, told CNBC: “The challenge is that the more we do to flatten the infection curve, we are actually also steepening the recession curve because as we do more of these measures, the right measures, to save lives … economic activity will be reduced and it will increase the risk of an economic downturn,”
Economic measures that Singapore announced include schemes to help companies retain workers, manage their wage bills and corporate tax rebates.
There will be specific measures to help the five sectors most vulnerable to the virus outbreak: tourism, aviation, retail, food and point-to-point transports services.
But many countries that have put in place stimulus packages are well resourced countries and the first question for South Africa is how much the country can put into a stimulus package.
At the end of 2019, South Africa’s Gross Domestic Product (GDP) stood at R5 trillion.
The Reserve Bank now forecasts the economy to shrink by 0.2% this year.
But that seems optimistic and Citi Bank puts the fall at 0.4%.
A more realistic figure seems to be between a fall of between 0.5% and 1%, which means erosion of between R 25 billion and 50 billion.
That’s the minimum amount that would need to be injected to shield the economy.
The latter figure is close to the revenue shortfall that South Africa is expected to suffer in 2021
Room for borrowing is limited but may have to be considered.
In the 2019 budget, South Africa’s debt to GDP Ratio was expected to move from 55.6% to 59.7% over the next three years.
In the 2020 budget the ratio moves from 56.7% to 71.6%.
Debt servicing costs currently stands at 18%.
Moving the ratio up by five percentage point to 77% would yield an additional R 250 billion and push debt servicing costs beyond 20%.
But if the R 250 billion is used for infrastructure, lowering the cost of logistics and consumption stimulation measures it would yield growth that would enable the country to service the debt comfortably.
There is nothing wrong with high debt, if you show how it will be managed.
The effects of this virus will be with us for the decade ahead whatever we do.
We might as well borrow our way out of trouble.
The South African Reserve Bank has taken a surprisingly, or perhaps unsurprisingly, hands off attitude towards the crisis.
At the Monetary Policy Committee press conference to announce a cut in interest rates last Thursday, Governor Lesetja Kganyago and his deputies Kuben Nadoo, Rashad Cassim and Fundi Tshazibana refused to be swayed to get involved beyond cutting rates.
Tshazibana correctly characterised the crisis as a health crisis “which required a first line health response” before it spilled over to be an economic crisis.
When asked which sectors of the economy would be hit the hardest, the bank’s leadership was non-committal, noting only that sectors that had large borrowing exposure would be adversely affected.
Asked if the bank is willing to use any of the tools at its disposal to assist commercial banks to help consumers, Kganyago refused to budge.
He noted that the banks’ reserve requirements will not be altered and assisting consumers is a matter between banks, their customers and competition authorities who may need to give permission for banks to act in concert without being deemed to be colluding.
He noted that the only tool they have at their disposal, the counter cyclical capital buffer, is currently used up and standing at zero.
The buffer is a requirement for banks to add capital when credit is growing rapidly which they can use when the cycle turns.
But South African commercial banks have exhausted theirs.
Kganyago was then asked if he is willing to inject liquidity should the need arise and simply argued that is what they do “all the time”.
But that may not be enough.
South Africa currently has foreign exchange reserves of around $55 billion.
Although reserves are primarily used for protecting the value of the currency, South Africa is loath to do that, scarred by the experience in 1998 under former Governor Chris Stals when trying to protect the rand cost the country $10 billion and left it with a Net Open Forward position that was not closed till 2004.
Reserves also serve as a confidence booster for investors to rest assured that their investment can be protected in times of crisis in the even of capital flight.
But reserves are also used as a source of liquidity in times of crisis or natural disasters, especially when a country’s access to imports is threatened.
This is a big a crisis as the economy will ever face, and Kganyago’s refusal to even discuss this option suggests he is putting the interests of investors ahead of those of South Africans.
Finally, amid the gloom, it looks like the Asian consumers will and their economies will lead the recovery from this outbreak, just as they did from the 2008 crisis.
This week, bankers in Asia returned to work after weeks at home just as those in Wall Street were being ordered to stay at home in their own shut down. It’s a long road ahead.
