The extension of the lockdown by two weeks will deepen the South African economy’s recession, according to an economist.
President Cyril Ramaphosa on Thursday evening addressed the nation, where he announced that the lockdown would be extended to the end of April to help slow down the spread of the virus. The president said he was mindful of the impact it would have on the economy, and added that Cabinet was still working on a “comprehensive package” of economic support measures.
“Unless we hold this course a little longer – this coronavirus pandemic will engulf and consume economy. We all want the economy to come back to life,” he said.
But the damage to the South African economy is already done, whether the lockdown was extended or not, according to economist Dr Azar Jammine, who spoke to Fin24 by phone following the president’s address.
The big dilemma
“The fact is, the damage has been done. The big damage has been done. It’s a matter of how one prevents the damage from being excessive as opposed to just severe. That is the dilemma we are facing right now,” he said.
Jammine pointed out that even if the lockdown was lifted, some economic activities probably would not have gone back to normal particularly the travel and restaurant sectors.
“Even if you lift the lockdown, the psychology of the country has changed … People will not rush to restaurants, they have become aware of the dangers of infecting each other by being in close proximity,” he explained.
Jammine said that in putting together the economic package, Cabinet would have to consider how to gradually lifting restrictions on some sectors – such as mining and the manufacturing industries and even allowing the delivery of non-essential items such as electronic equipment.
Independent economist and member of the president’s advisory council Thabi Leoka told Fin24 that going forward, government would have to consider increasing the fiscal support package to address the impact of the virus.
Ramp up support
Comparing SA to other countries, only 0.1% of GDP has been dedicated. “We definitely need to ramp up support,” she said.
Leoka expects more fiscal and monetary support to be coming through. So far the Reserve Bank has responded by slashing interest rates by 100 basis points and injecting liquidity into the economy. Treasury has also implemented tax relief measures.
While it is a difficult conundrum for Ramaphosa, who has to consider preserving lives, and the negative impact on the economy – the two are not mutually exclusive, she explained. “You need healthy bodies to be productive, to contribute to economic growth,” she said.
Investec chief economist Annabel Bishop said that although the lockdown will deepen the recession, with the Reserve Bank projecting a contraction of 4%, Ramaphosa’s decision took the best interests of South Africans into consideration.
“The crisis is far from nearing its end, however, both from a health and socio-economic perspective. Further measures are likely at the end of April, and consumer and business will take further strain even from the additional period now to end of April,” she said.
“Household and corporate balance sheets will weaken further from an already rocky start to the year after the recession at the end of last year,” Bishop added.
‘This is not helping’
Maarten Ackerman, chief economist and advisory partner at Citadel, said that the cost to the economy for the 21-day lockdown was already “enormous” and the extension would simply add to that. “Another two weeks would cut another 2% or so from GDP. So from an economic point of view, this is not helping the country,” said Ackerman. He warned that the extension could even tip the recession into a depression.
“It is hard to say whether the additional stimulus will be sufficient or whether it can be rolled out in time to provide the support where it is needed,” he said.
Ackerman added that strict measures taken now, might help to ease some restrictions in the weeks that will follow. “Over the next two weeks, we will need to look for the phased reopening of parts of the economy. It is one thing to save lives but another if you can’t feed those staying alive,” he said.
Ramaphosa said that of the R3 billion in funding being provided by the Industrial Development Corporation to focus on procurement of essential medical supplies, about R130 million had been approved for businesses which have applied. A further R400 million is to be approved in the coming week.
The Small Enterprise Finance Agency has also approved the postponement of loan repayments for a period of six months.
Small business debt relief and business growth facilities are currently adjudicating applications for assistance – a total of R500 million is available for support.
Government has also prioritised R1.2 billion to provide relief to smaller farmers and to contribute to security of food supply.
The UIF has set aside R40 billion to help employees unable to work and prevent job losses as a result of the lockdown. So far R356 million has been paid out.
Ramaphosa also implored businesses to continue to pay suppliers – to the extent that they can to avoid a crippling effect in the economy and to avoid force majeures.
The rand held firm on the news of the lockdown.
“The rand traded 0.5% softer leading up to the address by the president on Thursday evening, although the unit held steady as the president extended the lockdown by a further two weeks,” said Bianca Botes, executive director of Peregrine Treasury Solutions.
The rand is trading at R18.07/$, having strengthened to below R18/$ earlier on Thursday. But overall it has been taking a beating as investors rush to safe haven currencies amid expectations of a global recession, exacerbated by Covid-19.