It is hardly two months since the minister of finance, Tito Mboweni, in his budget speech confidently likened the South African economy to Aloe ferox, a plant that survives in arid conditions. It wins even when it seems the odds are against it, he said. He went on to reassure MPs that “the South African economy has won before and it will win again”.
No sooner had the minister stepped off from the podium, than a barrage of economic headwinds blew away the little hope for near-term victory or economic recovery. Fourth quarter gross domestic product figures confirmed that the economy slipped into a technical recession after experiencing a contraction for two consecutive quarters in 2019. The little confidence generated by the budget was shattered by loadshedding, to which the fourth quarter growth contraction is partly ascribed.
The risks of an economic depression have now emerged the Covid-19 pandemic, the effect of which is overwhelming some of the world’s biggest economies. The coronavirus pandemic will be the ultimate acid test of Aloe ferox. The coronavirus hit the South African economy at the time when the government is impaired to effect any plausible countercyclical fiscal adjustment – inject money in the economy to boost demand. This begs the question whether the economy can defy the odds and win again. Hard choices will have to be made over whether to water the plant or continue to rely on its inherent properties for endurance.
The irony is that a decision over whether a plant needs watering is usually a no-brainer. A wilting plant from dryness certainly needs watering, but it is not always clear what to do with an economy that is facing a risk of stagnation from a complex medical ailment that can shut down the respiratory system of affected people but has close economies. Estimates suggest that the economic effect of the pandemic could surpass the devastation caused by the 2008 financial crises and even World War II if the ongoing restrictions on commercial activity continues.
Economic activity — the ability of firms to produce, of countries to trade and of people to work and transact — keeps the world going around. There can be no economy when economic activity is mute. Sooner or later firms will lose the confidence to invest and capabilities to produce. People will lose the ability to earn incomes and the government cannot raise tax revenue. Such a predicament could spark an unprecedented economic depression, strife and loss of life. This is especially true for Africa where 80% of people survive on less than R90 a day and rely on the informal sector for jobs. Protracted work and trading restrictions could prove life-threatening.
The situation looks dire for the world economy and more so for African countries. Stock markets are plunging, capital is receding to safe havens and currencies are plummeting. The precarious situation of African economies dependent on debt, imports and sensitive sectors such as agriculture and tourism makes the continent vulnerable to the coronavirus-induced economic headwinds. The United Nations Economic Commission for Africa has revised the continents’ growth prospects for 2020 from 3.2% to 1.8%. A combination of weakening currencies, stunted foreign exchange reserves and rising yields on bonds would mean shortage of supplies, expensive food and essential medical supplies, and risk of sovereign credit default. South Africa is no better position, having been downgraded to sub-investment grade by Moody’s followed by a further downgrading of its banks to two notches below the investment grade by Fitch.
South Africa finds itself in an untenable situation exacerbated by electricity supply constraints and fiscal discipline problems. The economy entered the coronavirus era already in dire straits — debt rising and growth taking a nosedive. The budget tabled in February 2020 was at pains to find growth and recovery triggers to no avail because the salary bill continued raking in a lions’ share of the resources. Conventional economics suggests that the government should inject more money in the economy by either increasing spending or lowering taxes, assuming there are resources available either from reserves, savings or borrowing, to use in growth inducing spending. But it was evident from the tabled budget that the country doesn’t have the wherewithal to embark on fiscal expansion to smooth output declines either through borrowing or structural budget shifts.
The dire nature of the national budget constraint became clear when the president announced a rather timid coronavirus economic relief package backed by a R500-million relief fund for small businesses and a number of off-budget interventions ranging from soft loans (R3-billion) from development finance institutions to tax breaks and salary payment assistance for low income employees through the Unemployment Insurance Fund. This is undeniably commendable but it is a far cry when compared with the billions of dollars being used by developed countries to cushion their countries against coronavirus-induced economic shutdowns. By way of example, the United States senate has passed the largest economic stimulus budget of all time — $R2-trillion (six times the size of the South Africa economy) and Germany approved $R814-billion for economic relief packages. These interventions will see cash being injected into these economies through interest free loans to businesses, unemployment benefits and direct payments to distressed households. Granted, the comparison with South Africa is unfair, but the magnitude of the interventions show that economic resilience is not the only condition for economic recovery.
What then is to be done? The options are thin and yet the economy needs stimulus if it is to survive the double whammy of pre-existing constraints and the coronavirus pandemic. Turning to the World Bank and the International Monetary Fund exacerbate the debt problem and probably interrupt the economic reform programme proposed by the finance ministry. The solution rests not so much on illustrious budget allocation but on quality execution of existing policies on education and skills development, health, industrialisation, small business development, structural transformation and fiscal credibility. There can be no growth and recovery if the fundamental underpinnings of such growth are wanting.
The time has arrived to nurture the Aloe ferox.