Coronavirus.
Coronavirus.

How the national state of emergency will affect the economy

By Helmo Preuss Time of article published Mar 16, 2020

Share this article:

CAPE TOWN -  It was currently too early to tell what the economic impact on South Africa of the national emergency measures to combat the spread of the coronavirus would be, as the South African Reserve Bank (Sarb) has not yet met to consider a repo rate cut, nor has the Treasury yet announced any fiscal policy support measures. 

Nonetheless the containment measures announced by the South African government on 15 March, as well as those of other countries, was likely to lead to a contraction in economic activity in both the current quarter and the second quarter, with some economists even saying that we could have a contraction in the full year for the first time since 2009.

Nedbank chief economist Nicky Weimar said she had already expected the economy to remain in recession in the first quarter prior to outbreak of COVID19 and the national emergency/disaster declaration.  

“The first quarter decline will now just be deeper and likely to extend into the early part of the second quarter.  Thereafter some improvement off a low base is still possible, if the world and South Africa manage to stop the spread of the pandemic and manage to treat the ill effectively. Prior to the pandemic, we had GDP growth of 0.7% for this year, then we revised it to 0.3% after China & Italy imposed their lockdowns.  We will now have to re-examine our forecasts, but the risk of the economy contracting over 2020 is very high,” Weimar said.

In response to a question on what she expected from the SARB’s Monetary Policy Committee (MPC) meeting this week, she said she was expecting a 150 basis points cut, as the US Federal Reserve had cut by that amount in the last fortnight. 

John Ashbourne from the UK-based Capital Economics said it was too early to tell what the economic impact on South Africa of the national emergency measures to combat the spread of the coronavirus would be, but noted that the Treasury had limited fiscal maneuvering space.

“For now, it seems like the economic effect will depend on how aggressive the containment measures are. In China - and, now, Italy - we have seen entire industries totally shut down. The Treasury just does not have a lot of firepower at the moment. From a stimulus perspective, I suspect that the SARB will have to act first. I am expecting a 50 basis points cut on Thursday,” Ashbourne said.

He also expected a Moody’s downgrade to junk status later in the year, but said it would have little impact.

“The economic and financial dislocation caused by the virus will be much more significant than a downgrade,” he added.

Bianca Botes, the Treasury Partner at Peregrine Treasury Solutions, said South Africa, in line with the rest of the world, was in for a rough ride that may take years to correct. 
“The national state of disaster of itself is not what will really impact economic growth, although funds that were budgeted for use elsewhere will now be redirected to assist in the management of the virus. The real economic impact will stem from the local and global viral fallout, and the fact that manufacturing, production and ultimately economic activity is grinding to a halt. The travel ban will also have adverse effects on our tourism industry. As a whole, South Africa, in line with the rest of the world, is in for a rough ride that may take years to correct,” Botes said.

She said a Moody’s downgrade has become more likely, as the reallocation of funds to manage the viral breakout, and the negative economic impact of the pandemic will have 
adverse effects on the fiscal metrics and growth trajectory of South Africa. 

“In all likelihood, Treasury will look at easing tax in an effort to support business and consumers, although exactly what these tax cuts may look like is still uncertain. The SARB is likely to cut by at least 50 basis points given the economic challenges facing South Africa, with the Covid-19 outbreak exacerbating concerns –especially given the fact that inflation is leaning towards the lower end of the band, leaving the central bank some room to ease rates somewhat aggressively,” she concluded.

Stanford Mazhindu, the spokesperson of the trade union UASA said the school closures from Wednesday would have a major impact as there was a whole ecosystem that catered to school kids. 

“With schools being closed until after Easter, everyone in that chain will be affected including transportation people, people who sell food to them and students. Major events including the Jazz Festival in Cape Town have been cancelled. The impact this has on the finances of the organizers cannot be measured accurately right now, but there are big economic implications,” Mazhindu said.

He was not sure whether Moody’s would make a ratings decision at the end of March. 

“It might be that Moody's might decide not to rate South Africa or any other country for that matter while we are busy trying to contain the virus. Economic markets are struggling with a number of record breaking events taking place like the oil price crash,” he noted.

“The SARB at the moment would need to lower with at least 50 points. Bank of England and American Federal Reserve have lowered their policy rates in anticipation of the fall-out from the coronavirus and the low supply demand chain. We think the Reserve Bank should follow suit,” he concluded.

BUSINESS REPORT ONLINE 

Share this article:

Related Articles