Lockdown | Gradual opening up is good – but perhaps not enough

The gradual opening of industries like mining, fishing, some call centres and emergency repairs will help save some jobs in the country, but will not wave a magic wand on economic growth, say analysts.

Last week, Nkosazana Dlamini-Zuma announced that the National Command Council had decided in the second phase of South Africa’s lockdown, some industries would be allowed to operate at limited capacity, while oil refineries and coal mines that supply Eskom and oil companies can ramp up production capacity to 100{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. Export goods that were already sitting in the country’s ports before the lockdown can now be shipped too.

On Tuesday, President Cyril Ramaphosa also promised to address South Africa on Thursday on how exactly this phased reopening approach would work, and possibly announce which industries would be allowed to resume operations next. Government is opting for a “risk-adjusted” approach, balancing economic needs with the need to curb further spread of the virus. 

The relaxation of some rules has been widely expected, as President Cyril Ramaphosa told the nation when he was extending the lockdown period that government would evaluate how the country can “embark on risk-adjusted” phased recovery of the economy by allowing some sectors to the return to operation under controlled conditions. Business associations including the South African Chamber of Commerce and Industry (Sacci) had already started lobbying government to consider a staggered return to business.

“Obviously any part of the economy that we can get going safely will help but to be quite honest, it will probably not make much difference,” said PwC chief economist, Lullu Krugel.

Krugel said while the lockdown had a severe impact on the local economy, it’s not the culprit, and even if every industry returned to operation tomorrow, the coronavirus’ (Covid-19) trail of destruction would remain.

South Africa confronted Covid-19 already limping. The economy slipped into a technical recession in the second half of 2019, after shrinking by 1.4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in the fourth quarter after a 0.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} contraction in the third quarter. The SA Reserve Bank now expects GDP to shrink by 6.1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in 2020, while other observers expect the contraction to be in double-digits.

“The total effect of Covid-19 on the global economy, our trade partners and everything is culminating,” said Krugel.

More industries expected to open

Krugel added that she expects government to continue announcing other industries that can safely return to production over the next two weeks as new information and data on new infections becomes available.

Dlamini-Zuma did say during Thursday’s briefing that government would be easing the lockdown in an “orderly and incremental” manner. “We are going to probably every week be announcing which areas are being opened,” she said.  

But Nolwandle Mthombeni, investment analyst at Mergence Investment Managers, says even when more industries start to resume trading, consumers have been shaken by predictions of global recession and job losses locally. So, while businesses will open, the economy won’t immediately engage the high gears needed to recover.

“I think the less spoken about element is the psychological impact. I think people will be more reluctant to go out and spend, even if they now can,” she said.

Mthombeni said while the 200 basis points interest rate cut over the past month is aimed at cushioning the economy against that bruised consumer confidence, and will definitely add a stimulus to the economy, everyone will tread carefully around spending.

A strong recovery plan is needed

Ramaphosa announced a R500 billion Covid-19 stimulus package on Tuesday night, biggest once-off stimulus government has ever injected into the economy. 

The president took his time after last week’s Cabinet meeting to announce the stimulus which Krugel said was understandable given the varying inputs from different parties that the Cabinet had to consider in putting together the recovery plan.

After the announcement of the stimulus, Business for South Africa (B4SA), which is made up mostly of private sector leaders, said the president was able to carefully balance the allocation between relief for social stress and stimulating the economy. However, to enable the economy to regenerate, radical economic transformation, and the creation of this new economy that Rampahosa promised in his Tuesday speech must happen.

The Organisation Undoing Tax Abuse said because international relief grants and loans that the government plans to utilise to raise most the R500 billion offer temporary relief, there must be a long-term plan clearly showing how South Africa intends to expand the tax base by creating a more vibrant economy, as opposed to increasing taxes on an overburdened tax base. 

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