The challenges of South Africa's economic recovery

Francois Dosold – Risk and Resilience Consultant, Protean Business Solutions

With countries around the world expected to reach the peak of COVID-19 infections in a matter of months, economists project that the global economy will only recover its losses after two years. The devastation caused by the novel coronavirus is far worse than the 2008 financial crisis and the Great Depression (Sarpong, 2020). Economies and states have been unprepared as waves of infections hit quickly and intensely.

In South Africa, some economists believe that the economy will face a V-shaped recession – a quick fall to the bottom followed by a swift recovery and a decline in economic growth for a one-year period. Moody’s has already projected a decline of 6.5% in South Africa’s Gross Domestic Product (GDP) for the 2020 fiscal year (Reuters, 2020).

Text Box: Source: (Reuters, 2020)

While a recession is inevitable, it seems the coronavirus crisis has prompted a pressing of the economic reset button. PricewaterhouseCoopers (PWC) has released a report titled ‘Thinking through the possible Economic consequences of COVID19 for South Africa’, which looks at five areas in which the pandemic will have the greatest economic impact.

The disruption of supply chains

In the early days of the COVID-19 crisis, panic buying spiked, suggesting that a shortage of essential goods would occur during lockdown. However, this has not been the case. In a 30-day enforced lockdown scenario, trade could possibly be disrupted for roughly six months. China is slowly reopening for business and is tipped to be South Africa’s biggest trading partner, according to the World Bank. Imports for the South African market should stabilise and will ensure a constant supply of goods.

As China supplies the planet with everything from raw material to finished goods, the slowdown of manufacturing has ensured a bottleneck or two within the supply chain. South African firms should ensure an adequate stock level as lockdown regulations and trade restrictions may continue to be enforced. Alternatively, they should source from other suppliers to ensure minimal disruption.

South Africa’s labour market

While most organisations have been non-operational during the 35 days of hard lockdown, only a handful of ‘essential’ firms were able to keep the South African economy running.  Global leaders have praised President Cyril Ramaphosa for his bold and drastic steps to mitigate the effects of the pandemic; however, National Treasury predicts that around seven million jobs may be at risk, and this will lead to 50% unemployment in South Africa. Unemployment passed the 40% at the end of 2019, with a total of 10 142 000 making up the South African workforce (Mkhabela, 2020).

Organisations looking to retrench workers will surely come under pressure from labour unions. There is no doubt that labour unions have advanced social transformation in South Africa, but companies cannot make strategic changes without union acceptance or buy-in.  

Consumer and investment uncertainty

Before the pandemic, the Consumer Default Index (CDI) indicated that South Africa’s consumer debt had increased to roughly R1.7 trillion by the end of 2019. The slight increase of social grants and the repo rate cut puts a little more money back into the pocket of the consumer, but with thousands of jobs at risk, people are reluctant to spend.

President Ramaphosa’s investment drive at the end of 2019 surpassed R1.2 trillion and 2020 looked positive. However, the effect of the greater lockdown and the official downgrade of South Africa’s investment grade has led to a large amount of capital leaving the markets. A lower demand for the rand has seen the currency depreciating still further. The pandemic also triggered capital flight out of the economy, leaving the stock market trending downwards.

Economic policy response

While President Cyril Ramaphosa has announced the biggest stimulus package in the history of South Africa, some concerns are growing. While the R500 billion injection into the economy is a beacon of hope, the nation recorded a debt-to-GDP ratio of nearly 63% (CEIC Data, 2020). In assisting consumers during these difficult times, the state has offered various tax incentives for companies and taxpayers while the South African Reserve Bank (SARB) has implemented a cut the repo rate by a full 100 basis points.

Sector lockdowns

All sectors across the South African economy are feeling the pinch, but PWC’s report focuses on the retail, leisure and airline sectors. As we already know, South Africa’s state carrier, South African Airways (SAA), has been operating at a loss for quite some time, and the pandemic seemed to be the nail in the coffin for the airline. Projections made by the International Air Transport Association (IATA) indicate that the aviation industry will generate a loss of R40bn, with 186 000 jobs at risk and nearly 11 million passengers less than normal. Business travel reports the hardest impact compared to leisure travel, as explained by the CEO of South African Tourism, Sisa Ntshona. While the import and sale of goods in the retail space is at risk, what is remarkable is the sharp rise in online sales as the demand for online shopping increases (Frazer, 2020).

The Keynesian economic theory, developed by economist John Maynard Keynes, states that the solution to ending a recession is increased spending by the state, which helps to stimulate the economy. Professors Servaas Storm and Enno Schroder from the Delft University of Technology conducted a study regarding the fiscal stimulus for South Africa. The study explains that if a stimulus of R1bn is injected back into the economy, South Africa’s GDP will raise R1.5bn and more than 6 000 jobs will be created (Cameron, 2020). However, the Keynesian theory works perfectly in an economy were unemployment is low and wage growth is constant. With a depreciating rand, we can expect the cost of imports to rise, which will lead to higher prices for the consumer.

South Africa has the opportunity to grow domestic production and manufacturing, which will lead to an increase in job opportunities, income tax and exports. We have a willing and capable workforce, yet President Ramaphosa would need to address the hold that trade unions have on South Africa’s economy. If the state cannot implement the right policies now, then an economic bounce-back will be unlikely.