OPINION: Forging a new economy will require all hands on deck
JOHANNESBURG - With global infections now more than four million, deaths more than 280 000 with some 1.4 million recoveries and South Africa’s infections at 9 420, deaths at 186 with 3 983 recoveries, this is the very first time ever that the whole world is united on the same side against the Covid-19.
World trade is expected to fall by between 13 percent and 32 percent in 2020 as the Covid-19 pandemic disrupts normal economic activity and life around the world.
The wide range of possibilities for the predicted decline is explained by the unprecedented nature of this health crisis and the uncertainty around its precise economic impact.
But the World Trade Organisation (WTO) economists believe the decline will likely exceed the trade slump brought on by the global financial crisis of 2008‑09.
WTO deals with the global rules of trade between nations. Its main function is to ensure that global trade flows smoothly, predictably and freely as possible. Decisions taken now will determine the future shape of the recovery and global growth prospects.
We need to lay the foundations for a strong, sustained and socially inclusive recovery. Trade will be an important ingredient here, along with fiscal and monetary policy. Keeping markets open and predictable, as well as fostering a more generally favourable business environment, will be critical to spur the renewed investment we will need.
Global firms in trouble
US weekly jobless claims for the week ending totalled 4.4 million by April 23, bringing the five-week total to more than 26 million — as the pandemic spurred lay-offs across the country.
Berkshire Hathaway sold its entire stakes in the four largest US airlines in April. Berkshire chairman Warren Buffett said on Saturday at the company's annual meeting, "the world has changed" for the aviation industry. The conglomerate had held sizeable positions in the airlines, including an 11percent stake in Delta Air Lines, 10percent of American Airlines Co, 10percent of Southwest Airlines and 9percent of United Airlines at the end of 2019, according to its annual report and company filings. The conglomerate was one of the largest individual holders in the four airlines and in 2016 disclosed it had begun investing in the four carriers after avoiding the sector for year.
The global airline industry is witnessing a sharp drop in demand due to the current Covid-19 outbreak, which has impacted more than 134 countries.
With new travel restrictions imposed by several countries, several carriers have already streamlined operations and reduced the number of operating flights. Sir Richard Branson, the founder of the Virgin Group, is on the hunt for a white knight. With coronavirus wreaking havoc on the world’s airlines, Virgin Atlantic will need a substantial boost from the public or private sector, if not both, to prevent its collapse. But such a hero has not yet been forthcoming.
Requests to the UK government for a loan of £500 million (R11.3 billion) appear to be falling on deaf ears. In the meantime, the airline has hired investment bank Houlihan Lokey to reach out to investors able to provide the airline with emergency cash.
British Airways’ parent firm International Airlines Group (IAG) also announced a series of measures to mitigate the impact of the pandemic.
UK flag carrier British Airways is planning to lay-off staff and ground more aircraft as the coronavirus (Covid-19) pandemic continues to expand worldwide. In an internal memo to the staff, British Airways chief executive Alex Cruz said that the recent crisis is more severe compared with the last decade’s recession, SARS outbreak or 9/11 terrorist attack.
To address the worsening situation, the airline is planning to trim its workforce for ‘short period’ and also a ‘longer-term’.
The coronavirus outbreak has triggered unprecedented mass layoffs and furloughs (Furloughs, as opposed to layoffs, occur when employees are required to take an unpaid leave of absence). Many major companies have announced that they are downsizing their workforces.
Boeing Co has said it would cut its 160000-person workforce by about 10percent, further reduce 787 Dreamliner production and try to boost liquidity as it prepares for a years-long industry recovery from the coronavirus pandemic that drove its second consecutive quarterly loss.
The company's adjusted loss stood at $1.7bn (R31bn) , or $1.70 per share in the first quarter, compared with a profit of $1.99bn, or $3.16 per share, a year earlier. Over the weekend, Boeing cancelled a $4.2bn deal for Embraer SA commercial aviation, prompting the Brazilian company to initiate arbitration.
American Airlines has decided to reduce the number of international flights from the US by 75percent in response to ongoing travel restrictions and a drop in flight demand due to the Covid-19 outbreak.
Airbus will cut 2 362 jobs in its defence and space division by the end of 2021 due to stagnation of the space market and delay of several defence contracts. This was announced by the European aircraft maker this week. At an intra-departmental meeting of Airbus, the company announced that it plans to cut 829 jobs in Germany, 630 in Spain, 404 in France, 357 in the UK and 142 in other countries.
The European Commission has approved, under EU State aid rules, a €7bn (R140bn) French aid measure consisting of a state guarantee on loans and a shareholder loan to Air France to provide urgent liquidity to the company in the context of the coronavirus outbreak.
The measures were approved under the State aid Temporary Framework adopted by the Commission on March 19, as amended on April 3, and directly based on Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU), respectively. Lufthansa has put 87 000 workers on reduced hours. Among the group’s 135 000 employees, cabin crew, ground crew and for the first time ever, cockpit crew (pilots) are all affected.
Major businesses like Marriott International, the world's largest hotel company, said it had started to furlough what could amount to tens of thousands of employees on March 17.
On April 12, a union representing workers at Walt Disney World said the company will be furloughing 43000 employees starting April 19. The amusement parks have been closed since March 16 and 200 essential workers will continue maintaining them.
On April 28, online travel company TripAdvisor announced it was laying off more than 900 of its employees, amounting to a quarter of its workforce.
Ride-hailing giant Lyft is laying off 982 employees and furloughing another 288, accounting for 17percent of the company's workforce. The company made the announcement on April 29 and added that other cost-cutting measures include pay cuts for executive leadership.
On April 7, Tesla sent an email to employees saying it will furlough all non-essential workers until at least May 4, and reduce all employees' pay by at least 10percent. These cost-cutting measures were expected to start April 13.
Hertz said it plans to lay off 10 000 employees on April 20. The car rental company previously employed 38000 people.
Here at home, I am absolutely emboldened and energised by just how the government has corralled the force and impetus of the social partners into coherent action.
In the briefing presentation by the National Treasury on ‘Financial Implications of Covid-19 on both the Economy and Budget to the JT Standing Committee and Select Committee on Finance and Appropriations’ last month, I was personally filled with absolute confidence at the profound understanding, articulation and the plans that have been crisply, concisely and precisely put together.
The report recognises that South Africa’s faces a confluence of economic difficulties that compound the impact of the public health emergency.
That by the first quarter of 2020, the country was already in a economic downturn and sovereign credit rating was downgraded, which will raise the cost of government borrowing.
Estimates from the International Monetary Fund, the South African Reserve Bank (SARB) and the Organisation for Economic Cooperation and Development suggest that economic growth in South Africa will contract by between 6- 7 percent in 2020.
The economy currently faces overlapping aggregate demand and supply shocks, which are occurring sequentially.
These domestic shocks will be the most significant drag on growth.
The National Treasury estimates tha one-third of the resources that were productive in February 2020 have been idled, largely as a result of the domestic lockdown.
Real-time economic data, such as average daily transaction values through the payment system have more than halved as economic activity has declined. South Africa’s phased approach to resuming normal economic activity is informed by international experience.
The country has high levels of poverty and co-morbidity and living conditions make social and physical distancing highly challenging.
The longer that economic growth remains weak, however, the greater the risk that there will be permanent destruction of supply-side capacity with profoundly negative implications for households.
It also reiterates that the Covid-19 pandemic is simultaneously a health crisis and a far-reaching global economic crisis.
The government has acted decisively to prioritise the health and lives of all South Africans. Yet our economy, which was already weak before the emergence of the novel coronavirus, has been hit hard by interlocking shocks to supply and demand. The immediate priority is to support economic activity and alleviate hardship.
The government has adopted a risk-adjusted approach to reopening the economy with the initial easing of lockdown measures on May 1 .
The economic interventions over the next 18 months – a period during which the most severe effects of the public health crisis are expected to be resolved are set out in the presentation.
The government’s R500 billion support package will provide substantial support to the economy, but will increase the budget deficit and contingent liabilities. This fiscal support package combines revenue and spending measures, as well as loan guarantees, equivalent to about 10 percent of gross domestic product (GDP).
This is larger than equivalent support measures announced by other developing countries in the Group of 20.
The package includes a temporary, six months Covid-19 grant, directing R50bn towards relieving the plight of those who are most desperately affected by the pandemic.
In this regard, the child support grant will be increased by R300 in May and, from June to October, an additional R500 each month, while all other grant beneficiaries will receive an extra R250 per month for the next six months.
In addition, a special Covid-19 Social Relief of Distress grant of R350 a month for the next six months will be paid to individuals who are now unemployed and do not receive any other form of social grant or Unemployment Insurance Fund payment.
In the next several months, a special adjustments budget will set out a range of economic reform proposals and measures to stabilise the public finances.
Over the longer term, we cannot merely return the economy to where it was before the pandemic.
Forging a new economy
Forging a new economy in a new global reality will require, among others, a social compact between business, labour, communities and the government; far-reaching structural reforms enabling millions of South Africans to participate in building a more productive and prosperous society and steps to promote industrialisation and an overhaul of state-owned enterprises (SoE/C ).
The report references some of the key drivers of the declining growth trends among others such as the structural faults in the South African economy; the poor educational outcomes that perpetuate inherited disadvantage and low levels of labour intensive growth.
In detailing how South Africa will be affected by Covid-19, it touches on market sentiment, compounded by slowing economic recovery and new ‘oil war’; substantial disruption to international travel and tourism.
It looks at slowing consumer spending due to lockdowns, the fear of exposure to virus at large gatherings, social and recreational activities; as wel as changes to consumer spending patterns such as rising expenditures on medical services and lower spending on durable and semi-durables.
It also examines the disruptions to global supply chains, the increased disruption of domestic production due to illness or lockdowns as well as the
increased risk of workers being put on short-time or retrenched due to lack of demand, and rising liquidations.
Some of the potential economic effects are also retrenchment, no work being available, especially in low and medium skilled workers and those in informal employment. It also looks at the fall in demand for durables and semi-durables, personal services, retail, recreation and restaurant as well as lost production time due to sick leave and quarantines.
In communities where public health is already at full capacity, people are likely to find it difficult to access medical services, potentially leading to higher mortality rates exacerbated by underlying disease burden.
The poor may find it more difficult to recover from the outbreak due to lower accumulated savings, the impact of funeral costs and the loss of breadwinner income.
Particularly comprehensive has been the short-term economic support measures. The focus was on supporting healthcare, relieving hunger and distress, supporting companies and workers, reopening the economy in phases and intervening in monetary and financial markets.
In the next two years, the focus is on a co-ordinated, three phased approach to support employment and investment and a structurally high growth of Preserve, Recover and Pivot.
The report also identifies factors that could lead to upgrades and stable outlooks as including, formulation of a clear and credible path towards stabilising the government debt/GDP ratio over the medium-term.
It looks at how the government needs to deliver on its commitments to implement reforms and substantial improvement in the economic growth outlook and reductions of the SoE/C guarantee exposure.
It proceeds to identify some of the much needed reforms, which remain relevant in major sectors of the economy, like in telecommunications by finalising the digital migration; releasing spectrum through an auction process and leveraging the private sector for rolling out broadband to reduce the cost of doing business in.
In transport by introducing competition between port terminal operators to bring the performance of the major ports in line with international standards; corporatisation of the Transnet National Ports Authority in line with the National Ports Act of 2005; efforts to improve the operation of public transport; non-discriminatory pricing and access to the core rail network Tourism; further expansion of visa-free access−increased destination marketing and introduction of tourism safety police. In agriculture by effective leveraging of public–private partnerships to boost market access and issuing of water licenses within 120 days.
In trade by measures to facilitate regional trade (i.e. improved border-crossing arrangements that expedite the movement of goods and people).
It also highlights some of the barriers to entry as the implementation of the recommendations of the Retail Inquiry in order to address issues relating to long-term exclusive lease agreements; ensuring fair transparent rental rates; buyer power concerns; competitiveness support for spaza shops and small independent retailers and reducing red tape and improving access to development finance for small, micro and medium enterprises.
Bonang Mohale is the Chancellor of the University of The Free State.