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How coronavirus is infecting South Africa’s economy

Every number in the national budget is now not worth the paper it is written on. State and Eskom revenues will plunge. There could be a ratings downgrade. What is to be done?

By: Duma Gqubule

@DumaGqubule

17 Mar 2020

Analysis

16 March 2020: Shoppers wait to enter a large RETAILER in Johannesburg to stock up on essential items in the wake of President Cyril Ramaphosa declaring Covid-19 a 'national state of disaster'. (Photograph by Gallo Images/ ER Lombard)

South Africa’s economy, already reeling from its second recession in two years, has been hit by a perfect storm and a black swan since the START of the year. Due to brutal load shedding and an austerity budget, the economy was already set to decline for the third consecutive quarter during the first three months of 2020, according to forecasts. Now, the coronavirus (Covid-19) black swan, a term used in financial markets to describe a rare and unexpected event, will plunge the economy into its third recession in three years.

There are now dark clouds hovering over the world economy as the epicentre of the Covid-19 pandemic has shifted from China to Europe, where countries have implemented drastic public HEALTH measures to curb the OUTBREAK that could push major economies into recessions. Economists say a pandemic-induced recession is unique because the social distancing measures that are implemented to curb an outbreak result in simultaneous shocks to the supply (or production) and demand (or spending) sides of an economy.

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This means that there is a limit to the effectiveness of traditional monetary and fiscal policy tools used to revive economies. Adding fuel to the fire last week was an oil price war between Saudi Arabia and Russia that sent prices crashing to below $35 a barrel. Such factors have resulted in extreme panic on world stock markets, which have lost $13 trillion – $3 billion for each Covid-19 death – since 20 January 2020 according to an article in the Financial Times, which alluded to the possibility that the market reaction had been over the top. The Johannesburg Stock Exchange (JSE) has lost R4 trillion since the start of 2020.

In the rest of the world, many countries have announced comprehensive public health and macroeconomic policy measures to reverse the outbreak and counter the economic IMPACT of Covid-19. However, on 15 March in an address to the nation, President Cyril Ramaphosa failed to announce any measures to revive the economy. He only said cabinet was in the process of finalising a package of interventions to mitigate the expected impact of Covid-19 on the economy: “This package, which will consist of various fiscal and other measures, will be concluded following consultation with business, labour and other relevant institutions.”