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Absa Senior Economist, Peter Worthington, says Covid-19 and Moody’s downgrade spell even tougher times ahead for South Africa

Guest post: Peter Worthington, Absa Senior Economist

South Africa was already in recession when COVID-19 hit our shores, and Moody’s credit rating downgrade to sub-investment grade was likely even before the lockdown, due to South Africa’s stalled growth momentum, ballooning fiscal deficits and slow progress with essential structural reforms. Notably, Moody’s has retained a negative outlook on its new rating.

With the global economy now likely to enter a fierce recession, South Africa looks set for a very cold economic winter. Absa recently forecast that GDP in South Africa would contract in the second quarter by 23.5% quarter on quarter after seasonally adjusting and annualising the data, with particularly hard knocks for mining, manufacturing, and various service industries supporting tourism, which has now come to a dead stop.

At this stage, no one knows when the pandemic will be brought under control, nor what the multiplier effects of different negative economic shocks will bring. Covid-19 is a health shock which has mutated into a complicated tangle of a demand shock, a supply shock and a financial shock, all coming together at a time when South Africa was poorly fortified economically to deal with it.

We assumed in our recent forecast that some partial growth recovery would be likely in Q3, and that overall, the country would post a GDP contraction of about 3% in 2020. However, as we warned then, the risks were and are still skewed heavily to the downside here, and they have likely mounted in the short time since we published that forecast.

If the need for strict social distancing measures, which keep firms shuttered and people sequestered at home, lasts for longer than currently envisaged, the economic hit will be greater than we initially envisaged. With South Africa having reported the first confirmed coronavirus cases in some of its densely populated townships, Italy provides a sobering warning, with the government there now warning that the national lockdown, which was initially supposed to end only on 3 April, will instead be very long and lifted only gradually.

Positively, there is a possibility that South Africa’s relatively early rise to the challenge compared to some hard-hit countries that were caught more unawares will shepherd South Africa through the crisis somewhat relatively lightly.

But this is a hope, rather than a strong likelihood. Widespread poverty, and consequent crowding in densely populated townships, high rates of potential co-morbidity factors like HIV and tuberculosis, and weak public healthcare systems suggest that the crisis could easily escalate sharply and quickly here too. It is unclear how long the draconian social distancing measures, with their attendant costs on the economy, will need to last to bring Covid-19 under control.

Additionally, the SARB has implemented a range of other measures to secure essential liquidity in South Africa’s financial markets, including a watershed decision to buy government bonds as needed to secure orderly financial markets.

But at the end of the day, monetary policy measures are unlikely to be enough to lift the economy out of the ICU. Rather, substantial fiscal medicine is needed. Alas, the medicine is exceptionally expensive in South Africa, which had no fiscal buffers to speak of entering the crisis and which pays a high real interest rate for the spending medicine.

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