The South African economy is in a much more precarious position than had previously thought. The recession will be deeper, and the effects will linger longer than we had anticipated.
High-frequency data that looks at affordability and consumer behaviour, such as vehicle and retail sales, is still in contraction and sectors such as manufacturing and mining, remain constrained. When forecasting economic growth, a consideration of the duration of the pandemic has to be made.
While we are not all epidemiologists, examples internationally show a stabilisation in infections after the peak has been reached, leading to the loosening of Covid-19 restrictions. As we head into the summer season, we are likely to socialise more and be a bit lax in our behaviour. This will likely result in increases in infections and depending on the rate of infections, we could go back a level.
Opening and closing an economy is very costly and the uncertainty makes it particularly challenging for businesses to plan ahead. Already, large companies are putting off their expansion plans and the country is forfeiting much needed private sector investment. Small firms, that do not have access to funding facilities are disappearing, leaving many unemployed. It is no longer a case of survival of the fittest, because very few companies can survive under these conditions.
The pandemic requires countries to provide an enormous amount of fiscal support, which South Africa does not have. In fact, we had a significant deficit before the pandemic hit our shores. Shrinking the budget deficit is currently not a priority because the pandemic compels government to spend in order to support businesses and unemployed people. Unfortunately, the country does not have money to provide this support. Typically, South Africa borrows money by issuing bonds in order to pay for large capital projects such as roads, bridges and power stations. It does this mainly through weekly bond auctions, which amount to about R20 billion if nominal bonds, inflation-linked bonds and treasury bills are considered.
When the IMF approved South Africa’s request for emergency financial assistance of $4.3 billion (R75 billion) under the Rapid Financing Instrument, there was a national hysteria about these funds. This is the first time in democratic South Africa that the country has had to go cap in hand to the IMF. Some, including the Finance Minister, Tito Mboweni, have argued that the noise around the IMF loan is misplaced because the pandemic is not due to our own doing and the loan has favourable interest rates and comes with no conditionalities. That is correct, furthermore, our local market issuance is about R80 billion per month with a much more burdensome interest rate, compared to the R75 billion loan from the IMF.
Despite the stigma that the IMF destroys countries by imposing strict austerity measures, the real outcry was because the funds were applied for and approved at a time when state resources are being looted. The IMF loan, together with loans from the African Development Bank, the New Development Bank and the World Bank, are supposed to patch the holes created by the pandemic, but the well is leaking and there is wastage.
The fear that businesses and the unemployed may not receive the support to sustain them through the pandemic is not misplaced. The fear that doctors may not receive PPEs or that food packages will be stolen is not misplaced. The fear that UIF funds will be pilfered is not misplaced. This has become our reality since the lockdown.
The public may not criticise regular bond auctions that come with higher interest rates with the same anger as the IMF loan and some may not understand that weekly borrowed money is channelled to municipalities who are supposed to provide services such as waste management, electricity supply, sewage collection and road maintenance to communities. What irks us all is when we learn that over a three-year period, R4.27 billion of government expenditure was fruitless and wasteful. The public outrage is a result of the trust that has been lost over the years.
The government has assured the IMF that it will report all use of emergency funds and that all spending will reach the targeted objectives. If the recent looting of Covid-19 funds is anything to go by, I am not sure how the government will guarantee that every cent is accounted for.
Should we experience a second wave of infections, just like in some of the northern hemisphere countries, recovery will be extremely difficult.
Debt needs to be consolidated and growth-enhancing structural reforms need to be implemented. If this does not happen, I’m afraid we will be faced with a sovereign debt crisis.
* Thabi Leoka is an independent economist who has worked in financial services for over 17 years. She is interested in fiscal and monetary policy. She is also a member of the Presidential Economic Advisory Council. Views expressed are her own.
