THEBE MABANGA
AS THE SOUTH African government continues to strive for balance between saving lives and preserving livelihoods, recent indicators suggest that it is confronted with an economy that is grinding to a halt.
The first reminder of this stark reality came from car sales figures for the month of April, when it was reported they fell 98.4 % as car dealerships were closed due the lockdown.
According to the National Association of Automobile Manufacturers of Southern Africa (Naamsa), only 105 passenger vehicles were sold, while 496 commercial vehicles were sold.
Car dealerships have been allowed to reopen under strict conditions.
As expected, airport arrivals slumped by 99.7% in April compared to a year earlier after falling by 44.5% in March and following a 4.4% yearly gain in February.
Business conditions are also deteriorating significantly.
The Markit Purchasing Managers’ Index (PMI) eased to 35.1 in April from 44.5 in March, 48.4 in February and 48.3 in January.
This was the 12th successive month of contraction in private sector activity.
Purchasing Manufacturing index are used to globally to gauge manufacturers sentiments about the six months ahead about what orders they expect and how much labour they intend to hire or get rid of in that period.
The latest reading pointed to the sharpest contraction in the private sector on record, as lockdown began to bite.
Output and new orders declined to all-time lows and the job shedding rate accelerated to its highest on record.
Supplier delivery times lengthened at the quickest pace since the survey began in July 2011.
Then came the news that the South African Revenue Services expects a R285 million shortfall this fiscal year compared to what was announced in the February Budget.
SARS has missed its collection target since the 2008 Financial crisis, and then when it faced governance, administrative and governance challenges under embattled Commissioner Tom Moyane.
But such a shortfall is unprecedented and is the largest since SARS was mordenised in 1999 under former commissioner Pravin Gordhan.
It is unclear how government can fund this shortfall, except to pass of it through to as a budget deficit and then fund that as normal through borrowing.
This will mean a significant widening of the deficit from the current 6.9%, already the highest in 28 years.
The news does not get better for small business, seen as key employment creators in SA.
A survey by the National Small Business Chamber (NSBC) found that only 8.5% of small businesses are back to normal at Level 4.
More than 75% will only be back to normal at Level 2 and Level 1, the most being at Level 1.
NSBC founder and CEO Mike Anderson says one of the disturbing challenges facing small businesses is the inability for them to access relief-funding.
“The survey revealed that of the 53% of small businesses that applied for relief funding, only 6% of the applicants received funding.”
Reasons cited for this range from poor or no response, unnecessary qualifying criteria and a lengthy and tedious processes.
Ninety-four per cent of small businesses stated that they are either now in a cash flow crisis or will be within the next 30 days.
79% of businesses surveyed expect not to survive the pandemic or are unsure if they will survive.
This week, the South African Reserve Bank will give its assessment of the damage caused by COVID-19 and hopefully an update an update on the measures it has adopted since March to boost liquidity.
These include the purchase of government bonds on the secondary market for the first time since the 90s.
In April, the Bank bought R 11,4 billion worth of government bonds.
If, as expected, the Reserve Bank cut interest rates, they will join the Banks of the Czech Republic, Norway, Malaysia as well as Mexico, Pakistan and North Mecedonia in doing so.
South Africa also must think of the long term impact of the pandemic.
One area of focus in post COVID-19 recovery will be infrastructure spending.
Earlier this month, Rand Merchant Bank CEO James Formby declared infrastructure spending as a “must do” for South Africa to stimulate recovery noting that the country “can no longer afford to wait.”
South Africa’s flagship infrastructure funding vehicle is the R 100 billion infrastructure fund to be housed at the Development Bank of Southern Africa and to be headed by Sean Phillips, the man who oversaw the launch of Extended Public Works Programme more than 15 years ago.
But given that the fund is R 100 billion over ten years, an average of R10 billion a year, it is not designed to do everything, meaning it will need to draw in private sector player, like Formby’s RMB.
For instance, the first phase of Gautrain cost R25 billion and it is likely that the mooted expansion will cost similar if not more.
The recent ratings downgrade will hit South Africa particularly hard in this area as they will raise the cost of borrowing.
First South Africa’s entities that raise money on the bond market, such as South African National Road Agency Limited (SANRAL), Rand Water and Metros like Ekurhuleni and the City of Joburg will face a higher cost of borrowing as they will find their own gradings moved down a notch on both the short and long term domestic and foreign currency notes.
The government itself will face higher costs for its own needs.
The best shield government has is to keep the proportion of South Africa’s debt that is foreign currency denominated at current low levels of around 10%.
All this comes in the backdrop of Treasury’s own grim assessment of the economic outlook. Treasury released a scenario planning document in which they assessed the likely impact of COVID-19 on the economy and the national budge. Of the three scenarios envisaged, the quick scenario is already out of the window.
South Africa now faces the slow scenario under this scenario, Treasury assumes that pandemic takes longer to contain, causes greater underlying damage in terms of production capacity and employment and therefore the economy is much slower to recover.
Under this scenario real GDP is forecast to shrink by 12.1% in 2020, with fixed investment collapsing by 26.6% and consumer spending plunging by 11.4%.
“Under these circumstances, there are significant company failures and large job losses.”
There is also a “long recovery scenario where the pandemic extends beyond 2020”, but no one is talking about that just yet.
(Additional reporting by Inside Politics staff)
