‘When times are good prepare for war. When the economy is booming, prepare for a recession,” Isaah Mhlanga, chief economist at Alexander Forbes, said this week. He was reiterating sentiments he had tweeted about South Africa’s gloomy economic outlook in a time when the coronavirus disease (Covid-19) is forecast to slow down global economic growth.
On Monday, global stock markets dropped steeply as an oil price war between Russia and Saudi Arabia loomed and, in the face of Covid-19, demand was decreasing. This came just a few days after South Africa entered into a technical recession, with data showing that the economy hadn’t grown in the third and fourth quarters of 2019. South Africa was in a bad place even without the negative health and economic effects of the disease.
With 109577 people having been infected according to the World Health Organisation figures on Monday and sweeping quarantine measures spreading to countries such as Italy, a wave of uncertainty gripped the global markets and caused stocks to gyrate.
In times such as this investors have done what they usually do — give up their equity in favour of less risky asset classes, such as gold and bonds — known as “defence assets” because they guarantee a return on investment in bad times, according to Mhlanga. Some even sold their shares for cash because real money does not fall like stocks do, said Wayne McCurrie, a senior portfolio manager at FNB Wealth and Investments.
Monday’s global stock market decline was at a rate last seen during the financial crisis of 2008. This kind of shock was not on the cards when Finance Minister Tito Mboweni set out his annual budget in February. At that point, China — the second largest economy in the world — was starting to roll out quarantine measures that would virtually halt production in parts of that country. The effect of that is now being felt around the world and is likely to be exacerbated by the implementation of similar quarantines elsewhere in the world.
Concerns are growing that supply chain disruptions and other effects will push the world economy into another financial crisis. That will
hit indebted emerging markets hard. And China is South Africa’s biggest trading partner, with 12.1% of exports going to China last year. The majority of those were commodities.
Mhlanga said growth in the fourth quarter of last year being negative is a problem because, generally, growth in the next quarter tends to be lower. This could mean that the economy also contracted in the first quarter of this year.
Added to this is the effect of Covid-19: the JSE’s all-share index fell by 5.5% on Monday and tourism will probably be affected because people aren’t travelling as much.
He added that this will probably result in South Africa missing the treasury’s 0.9% growth forecast for the year. “The low growth will [have an] impact on our tax revenues where we are going to under collect yet again.”
Mhlanga said the economic consequences of Covid-19 are greater than the severe acute respiratory syndrome, known as SARS, which was first detected in 2002 in Guangdong province in China. He said this is because its economy was about $1.5-trillion then. Now it’s 10 times bigger, with many countries tied to its fortunes through trading partnerships.
This week the United Nations Conference on Trade and Development (UNCTAD) estimated that Covid-19 will slow growth in the global economy to under 2% this year, and will probably cost the global economy $1-trillion.
Last week, the Organisation for Economic Co-operation and Development said the spread of Covid-19 presents the global economy with its greatest danger since the 2008 financial crisis. The organisation called on governments to act immediately to limit the spread of the disease to protect people and businesses from its effects and shore up demand in the economy. It said global gross domestic product (GDP) growth could contract this year to 1.5%, from the 2.9% rate it forecast before Covid-19 took hold.
On Monday, another blow to global markets landed when Saudi Arabia ramped up oil production after it failed to convince Russia to cut production as a response to falling demand largely from Asia caused by the spread of Covid-19. This led to global oil prices plummeting by 30% and stocks in large oil companies dropping by as much as a quarter.
In an attempt to cushion their economies from the effects of Covid-19, some countries have already looked at monetary policy solutions.
Last week, the United States’ Federal Reserve lowered its interest rates by 50 basis points to a target range of 1% to 1.25%. Prior to this decision, Australia lowered its interest rates by 25 basis points to a record low of 0.50%. A lower interest rate means people pay back less on loans, which means if the economy slumps, their costs go down and they can survive. The US government is due to vote on a stimulus plan for its citizens.
In response to these attempts, George Glynos, the co-founder and head of research at financial market and analysis firm ETM Analytics, said: “At a very basic level, reducing interest rates does not stop the spread of the virus. So if the spread of the virus escalates significantly further, the reduction in interest rates will offer some assistance to those who are indebted but it does not prevent the disruption.”
Other, better-off countries are coming up with ways to cushion themselves from the economic shock, but South Africa is a different case; it’s trying to bolster an economy that is already on its knees.
Mhlanga said when the 2008 financial crisis hit, South Africa had surplus money it could use to stimulate the economy. The situation is different now. In the decade after the financial crisis, which includes the “wasted nine years” under former president Jacob Zuma, South Africa increased its borrowing and its gross loan debt now stands at R3.18-trillion; but it did not use the money to boost the economy. “So we did not prepare for bad times when times were good, which is why today we do not have the fiscal space to respond to the economic decline,” he said.
In the 2020 budget speech, the treasury said South Africa is spending more than the economy can afford, and borrowing at an increasing rate to fund the shortfall. The country’s debt-to-GDP ratio is set to be 71.6% by 2022-2023. The budget proposed putting a hold on this trajectory by cutting the public service wage bill by R160-billion over the next three years.
The UNCTAD said debt in developing countries has reached 191% of their combined GDP, the highest level on record. It said it is of major concern that these countries, which are already facing deteriorating debt positions, will not have the reserve cushion to withstand the temporary but possibly pronounced effect of the Covid-19 shock on their real economies.
The South African Reserve Bank is due to meet between March 17 and 19 to discuss whether it will cut interest rates. But Mhlanga said that even if it is reduced, it will not do much for South Africa because consumer confidence is low. “Even if you reduce interest rates it’s unlikely to result in high spending because we have an increase in the unemployment rate. People cannot service the debt because they are not earning an income; that complicates a bit of our situation.”
He added that in South Africa’s case the effects of the disease will be seen with the rise of the unemployment rate as more companies shed jobs and the economy potentially continues to contract.
Covid-19 is hitting a weak South Africa, which wasted the good position that it was in before the 2008 recession. And this is before the disease has made its full effect globally.
Tshegofatso Mathe is an Adamela Trust business reporter at the M&G