As the world economy hurtles towards a sharp and punishing recession, economists are slashing SA’s growth forecasts for the year with a full-year contraction for 2020 now almost certain.
With a growing global consensus that the Covid-19 crisis could be deeper than the 2008 global financial crisis, SA’s acutely fragile fiscal position signals grave dangers ahead and is likely to see the debt burden accelerate, tax revenue fall further and borrowing conditions for government and state-owned enterprises become a lot tighter.
In a move likely to add more pain for SA’s services industry and put more pressure on growth, the government on Wednesday released new regulations requiring clubs, bars, restaurants and taverns to scale down their operations and restrict trading hours.
The virus, which began in Wuhan, China, has spread to 157 countries. A national state of disaster was declared in SA on Sunday in a bid to curb the growing pandemic.
S&P Global said on Tuesday that it forecast a global recession in 2020, “as the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress”.
The crisis could not come at a worse time for SA, which had slid into recession in the fourth quarter of 2019.
SA has limited fiscal firepower to buffer its economy against the domino effects of necessary containment measures against the virus, globally and at home.
The number of cases of Covid-19 in SA has risen rapidly since the first case was announced by health minister Zweli Mkhize on March 5, and stood at 116 on Wednesday morning, including 14 cases of local transmission.
In the budget, the Treasury forecast the economy would grow at 0.9% in 2020. Economists from major banks are now pencilling in growth between 0% and a contraction of 1%. Most of these have not modelled for the effect of the virus and are likely to be substantially revised to the downside.
“We are talking about a very deep global recession in the first half of the year, with the worst of it to be felt in the second quarter,” said Jeff Schultz, economist at BNP Paribas. BNP Paribas projected earlier in 2020 that SA’s GDP would shrink 0.2% in 2020, but Schultz said a contraction of more than 1% now “seems increasingly likely”.
“This leaves SA in a perilous fiscal situation with a very big increase in the debt to GDP.” BNP’s projection of debt-to-GDP reaching 70% by 2021 could now happen by the end of the current year, he said.
Peter Attard Montalto, head of capital markets research at advisory firm Intellidex, said GDP could contract 2.3% in 2020. Under this scenario, the deficit would “leapfrog” to 10.8% GDP in the coming 2020/2021 fiscal year, while debt to GDP would go from 62% in the current fiscal year to 74.4%. That would require an additional 36% in debt issuance by government, he said.
According to the 2020 Budget Review, the government has pencilled in a deficit of 6.8% in the 2020/2021 fiscal year, projecting that it will drop to 5.7% in 2023. It expected a debt-to-GDP ratio of 65.6% for 2021. These were already seen as unrealistic, premised on growth numbers that are unlikely to be realised and a cut in a wage bill that was not yet agreed with organised labour.
Sanlam chief economist Arthur Kamp warned of an unprecedented crisis. “From an economic policy perspective, this can’t be resolved with the usual macroeconomic tools since it is a behavioural response to a crisis.”
The deteriorating fiscal position makes it more likely that SA will lose its last remaining investment-grade rating, which may push its borrowing costs even higher, with yields on SA 10-year bonds having already spiked to double digits.
As pressure mounts, all eyes are zeroed in on the decision by the Reserve Bank on Thursday.
Expectations have mounted that the Bank could cut rates dramatically in an effort to help ease the plight of consumers and businesses. Alongside this, the government has promised a stimulus package to help shore up the economy — though details have yet to be outlined.
In the meantime, however, the state has called on the country’s major banks and financial sector institutions to ensure credit lines and working capital arrangements are kept open for businesses and households.
Analysts have, however, argued for a more dramatic,
co-ordinated response from the Bank and financial sector, which would include elements such as repayment holidays and lower rates especially for small businesses.
Gina Schoeman, Citi SA economist, said that Thursday’s interest-rate decision as well as other measures that the banking sector — such as payment holidays or extension of loan terms — would have a direct bearing on how deep SA’s recession turns out to be.
“With a 50 basis point cut as well as relief measures by retail banks we can offset some of the recession we will otherwise experience.”
Standard Bank is most bullish, with chief economist Goolam Ballim expecting 0% growth in 2020 and a downturn that will be sharper but briefer than the 2008 crisis.
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