Thebe Mabanga
The world’s major oil producers moved to support the price of Brent crude oil as uncertainty over the depth and extent of the COVID 19 pandemic fallout continued to grip the global economy.
On Monday, the Organisation for Petroleum Exporting Countries (OPEC) announced plans to cut just under 10 million barrels a day from global oil production.
This is to remove the glut of excess supply caused by the fact that most major economies are under lockdown,
But the move will also raise the price of oil and maintain profitable margins for producers.
Following the announcement, the price of Brent Crude Oil traded at $32 a barrel. This is after falling to 20 year lows of $20 a barrel over the past week after trading above $ 70 a barrel earlier this year.
The deal followed a weekend of marathon video conferencing meetings between OPEC and ministers in G 20 countries.
In South Africa the grim extent of Covid 19 was revealed last week when the Reserve Bank released its monetary Policy Review for the first quarter. The Bank announced that it now expects the South African economy to shrink by between 2% and 4% in 2020 after stating that it expects growth to decline by 0,2% at the time of its Monetary Policy Meeting a month earlier.
Even the revised estimates of 4% may prove optimistic, which growth likely to slow by at least 5% according to some estimates. If that happens, it will shave off R 250 billion off South Africa’s R 5 trillion GDP.
This would suggest that is the amount in lost production that would need to be replaced by any stimulus measure that government puts in place post the Covid 19 pandemic.
In its response, the Reserve Bank cut the repo rate by 100 basis points in March and has now been called on to cure some more without waiting for its MPC meeting in May.
The Bank has also embarked on a programme of bond buying to inject liquidity into financial markets, although this is not likely to on the scale undertaken
The Reserve Bank calls the last quarter of 2019 “a bad ending to a lost decade” as it points out that the decade was the worst for growth on record. GDP contracted by 1,4% following a 0,8% contraction in the third quarter sending South Africa to a technical recession for the second time in two years.
“It also confirmed that the 2010s were the worst decade for South African growth on record, “says the Reserve Bank.
“Total output expanded by only 15.9% between the first quarter of 2010 and the final quarter of 2019, which compares unfavourably with the crisis ridden 1980s and 1990s, during which GDP grew by a total of 18.9% and 16.7% respectively.”
The Bank also notes the unusual character of the current downswing. It says previous downswing last for an average of 20 month, with the worst on record from March 1989 to May 1993 lasting 51 months.
The currency downswing has lasted 74 months, and imports have been unusually buoyant whereas they normally fall during a downswing while public investment in falling faster than usual.
This could be the result of slowing down of infrastructure spending following the near completion of Medupi and Kusile power stations and no new major projects coming on stream.
The Corona Virus hit South Africa as early as February. Two weeks ago, new car sales figures showed new car sales in South Africa fell by 29% while export fell by 33% as Covid 19 hit Asian countries which are key exports destinations for Some of South Africa’s exports including cars.
Some of those Asian countries, from Hong Kong and Singapore as well Wuhan in China, where the virus is thought to have originated, are gradually moving back to normality and lifting lockdown.
Last week, the World Trade Organisation Announced that it forecasts global trade to fall by a third in 2020, probably deeper than it did after the 2008 Global Financial Crisis.
“This crisis is first and foremost a health crisis which has forced governments to take unprecedented measures to protect people’s lives,” WTO Director-General Roberto Azevêdo said in a statement, echoing a view expressed by Reserve Bank Deputy Governor Fundi Tshazibana.
“The unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself.”
Azevedo said the immediate goal is to bring the pandemic under control and mitigate the economic damage to people, companies and countries. “But policymakers must start planning for the aftermath of the pandemic,” he said.
On Sunday, President Cyril Ramaphosa in his capacity as chair of the African Union appointed Trevor Manuel, Dr Ngozi Okonjo-Iweala, former African Development Bank CEO Dr Donald Kaberuka and Tidjane Thiam as Special Envoys of the AU to mobilise international support for Africa’s efforts to address the economic challenges African countries will face as a result of the COVID-19 pandemic.
