What would you like to hear first: the good news or the bad news? Or about the big grey area — that unexplored, longer-term terrain where SA’s future remains in the balance, caught between the prospect of a sustainable growth recovery or a debt trap?
Which way the country ultimately tips depends largely on whether the common good and evidence-based policy prevail over the populist clamour of vested interests. Either way, the next few months are going to get very noisy.
But first, the good news. SA’s R500bn Covid-19 relief package is not going to sow the seeds of SA’s fiscal unravelling or require much of an increase in debt issuance. It is both affordable and well-targeted at the firms and households that need help.
The bad news is that the economy is unlikely to experience a rapid rebound — a V-shaped recovery — from this year’s steep recession. Since SA is adopting a gradual approach to lifting the lockdown, in which many firms and jobs may be permanently lost, the economy may well experience an L-shaped recovery, where growth bumps along the bottom for an extended period.
As to the longer term: it all depends on whether the government can extend the decisiveness it has shown in dealing with the epidemic to the rest of the economy.
If it can act boldly to implement tangible structural reforms to get growth going once the virus has run its course, 2020 could be the start of a turnaround. If not, SA could face years of debt distress.
There are still several unknowns regarding the R500bn (10% of GDP) relief package. It remains unclear, for example, how much funding will be sought from the International Monetary Fund (IMF) and other external sources. Close to R80bn? And how much can be tapped from the Unemployment Insurance Fund (UIF) — R40bn or R100bn?
Despite holding a press briefing on the funding implications of the package last week, finance minister Tito Mboweni failed to clarify exactly how much on-budget finance will be needed, so it remains unclear how much more the state will have to borrow on the bond market.
As SA’s exit from the World Government Bond Index looms at the end of April, and foreign appetite for SA assets continues to wither, "official guidance from the National Treasury and the presidency alike is of the utmost importance to both markets and South Africans to remodel their confidence", says Rand Merchant Bank analyst Nema Ramkhelawan-Bhana.
Every economist has done their own back-of-envelope calculations and each one is slightly different. What we do know is that from the R500bn it is safe to subtract R130bn, as this will be found by shifting funds away from departments such as housing and tourism, where spending can be delayed. It will not be new money.
A further R200bn can be subtracted for the national credit guarantee scheme, as it will be fiscally neutral initially. It requires the National Treasury to guarantee cheap loans advanced by the banking sector to distressed firms. Because firms have five years to pay these off, it is only then that any bad loans will rebound on the national balance sheet — in other words, on the taxpayer.
That leaves a package of R170bn (about 3% of GDP) — nearly all of which could conceivably be covered by tapping the UIF and external funding sources. SA is technically entitled to borrow R80bn from the IMF at a 1% interest rate, with few strings attached. The Treasury is expected to make a formal approach for funding soon.
In short, the R500bn package is affordable. Not only that, says Wits University adjunct professor Michael Sachs, "the cost of not financing large fiscal operations is unambiguously greater than financing them, even though we have funding pressures, even at a higher interest rate".
Put simply, Sachs believes every rand spent on combating the virus will yield such a huge return that it doesn’t make sense not to go big, even though the government has a binding financing constraint.
Sanlam Investments economist Arthur Kamp likes the package because "it shows a preparedness to use unusual policy instruments to address an unusual problem, while recognising that SA has no fiscal space".
And he believes its intent is exactly right: "To break the vicious feedback loops between falling supply and falling demand, to limit domestic-government funding pressure by making use of external financing, and to help people and businesses to bridge the divide between yesterday and tomorrow."
The bad news
While the package may lead to a shallower recession by keeping existing firms alive, no new money is being poured into fixed investment. In fact, it will be impossible for the government to free up R130bn through budget reprioritisation unless it cuts capital spending, which will subtract from growth.
Peter Attard Montalto, head of capital markets research at Intellidex, has lowered his 2020 real GDP growth forecast, from -9.7% to -10.6%, despite estimating that the package will add six percentage points to growth this year.
This is because he is factoring in a stop-start lifting of the national lockdown. He expects the process of re-opening the economy to drag on until the start of September, costing SA about R3.5bn a day.
"We think the market still vastly underestimates the way the lockdown will unfold and its damage to the economy from here," he says.
"Broadly, we expect there to be some loosening for a few weeks, then tightening again as we move towards the September peak. In the run-up to the peak we expect a nationwide lockdown of stage 5 again."
Nazmeera Moola, head of SA Investments at Ninety One, says that if the relief package succeeds in keeping small firms alive, the growth rate could ramp up nicely next year. But any recovery will be muted by the extent to which SA experiences only a slow, gradual return to production and the possible destruction of capacity.
The IMF expects a V-shaped recovery for SA, having forecast -5.8% real GDP growth for this year, followed by 4% in 2021. Moody’s is equally bullish about 2021, forecasting a 6.5% contraction this year and 4.5% growth next year. The SA Reserve Bank has been more cautious, forecasting -6.1% this year, followed by growth of 2.2% in 2021 and 2.7% in 2022.
If the recovery is L-shaped, it will be difficult for the government to terminate, after just six months, the top-up to social grants or to end the special Covid-19 distress grant aimed at the unemployed and those who don’t qualify for other benefits.
While Moola says the R50bn these grants will cost over six months is vital, "it’s completely unaffordable to continue with these payments on a long-term basis".
However, she worries that withdrawing the grants "could spark a bit of a revolt".
"Even if the lockdown and epidemic have passed, the economy will still be sluggish and the news will be full of stories about how people are going to be starving from month seven," she says.
One way to prevent this is to ringfence the Covid-19 package in a separate budget, or to apply a strict fiscal rule to prevent new entitlements from cannibalising existing baselines.
Mboweni has ruled out any extension to the social grant top-ups beyond six months and says he will soon be tabling a revised budget bill that captures all Covid-related fiscal measures.
The debt question
The bigger concern is the longer-term fiscal impact of the pandemic, caused not by the support package but by the impact of the growth shock on government revenue.
Moody’s now expects SA to record a budget deficit of 13.5% of GDP in 2020/2021 — double the 6.8% estimated by the government in the February budget. By Moody’s calculation, which includes Treasury guarantees to state-owned enterprises (SOEs), this will push SA’s debt burden up by 15 percentage points, to 84% of GDP by end of fiscal 2020.
Moody’s suggests, citing the examples of the Land Bank and SAA, that the weakening of SA’s public finances will constrain the government’s ability to support SOEs, causing their financial position to deteriorate and SA’s economic difficulties to worsen.
Estimates vary, but the bottom line is that SA is looking at "a permanent step-up in unemployment, a permanent loss of growth and a permanent shrinkage of fiscal revenue space", says Attard Montalto.
The million-dollar question is whether SA will be able to prevent a bond-market revolt as the full fiscal implications of the growth shock become apparent.
The problem, says Sachs, is that SA was on an unsustainable fiscal path with no plan on the table to stop that trajectory even before the virus struck.
"Without an effective reconstruction of SA’s path of growth and distribution, SA will face years of debt distress."
At some point, demands for unorthodox policy responses like prescribed asset requirements and the printing of money by the SA Reserve Bank to fund fiscal expenditure are likely to become deafening.
Though the Treasury and the Bank are dead set against risky, quixotic policy responses (and for good reason), Citibank economist Gina Schoeman believes that as long as they act in a transparent, co- ordinated and sensible way, there may be more policy room to experiment than is currently allowed.
For instance, many economists are questioning why the Bank isn’t leveraging off its international credibility to roll out a much larger quantitative easing programme to drive down long-term domestic bond yields.
But no amount of fancy footwork is going to restore SA to fiscal sustainability unless it can sustain rapid growth.
Sachs expects that, if SA is unable to forge a new social compact to drive real productivity growth, the government may have to drop its pretensions of being a developmental state.
He envisages a future in which the government is forced to narrow its focus to being just a tax-and-transfer state — one that is concerned with taxing citizens to just pay wages to public servants and social grants to the poor. The state’s contribution to development would be reduced to a purely regulatory role.
If this is SA’s likely future, Mboweni certainly hasn’t got the memo. At last week’s press briefing, he spoke passionately about the need to reimagine a new economy, in which the manufacturing of goods is brought home from China to SA; underutilised land is allocated to new farmers; the private sector is involved in upgrading and running Durban harbour; and new companies are forged from the "dying ashes" of old ones — including a new airline to replace SAA.
Of course, it is all just fantasy unless the government can convince bond-market investors to fund SA at reasonable rates. To do that, the government has to deliver urgent, tangible reforms, including slashing unnecessary licensing measures and other red tape, allowing private electricity generation, and finalising the sale of spectrum.
Relief package should allow a shallower recession, but its positive effects will be offset by a slow end to the lockdown
— What it means:
"The reform agenda will ultimately determine what the pick-up looks like in 2021/2022," explains Moola, "because it’s not just about keeping businesses alive — it’s about engendering confidence so that firms don’t give up but go through the hard yards to survive. That’s why some tangible progress on reform is really important."
She is hopeful that this can be achieved: "We’ve seen a level of decisiveness and efficiency in combating the virus that we’ve never seen before from this government. If [government does] this more broadly, then we can find a path to fiscal and economic sustainability and job creation."
Many economists cite the fact that civil servants did not get salary increases in April, as well as the government’s refusal to extend more money to SAA, as signs of a new seriousness on reform.
Old Mutual Investment Group chief economist Johann Els predicts that SA will look back to this period "as the start of a long-desired turnaround".
He has high hopes that the co-operation engendered by the pandemic could give rise to a new social compact on the economy. Business could, for instance, buy into a voluntary prescribed asset programme (which would allow pension funds to have a say in how much they will invest, and in which assets) in exchange for labour supporting labour-market reforms, SOE restructuring and privatisation.
It’s not impossible that, on the other side of the pandemic, a battle-scarred nation could find the will to do things differently. Stranger things have happened in a world upended by the coronavirus.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.