In the midst of massive and rare occurrences that have a severe impact – ‘Black Swan’ events, – forecasts have little credibility. The key determining factor of the depth and length of the Covid-19 depression is how long the lockdown and restrictions will last. That is a big unknown.
Bill Gates, whose foundation is funding vaccine development, says nothing will be available for ‘at least’ 18 months. That gives us a very rough timeframe, but, even then, it will probably be a lot longer than 18 months.
There is, as yet, no therapy available and we do not know how long it will take for the virus to run before the infection rate drops to what might be acceptable levels. So, we could be in for a long haul as social distancing and travel restrictions remain in place, even after the lockdowns have ended. That means a world of vast uncertainty.
While economic forecasts should be given a wide berth at the moment, aspects of the direction of travel are somewhat less uncertain. The scenario planners have underscored in recent weeks that events such as the Covid-19 crisis have the effect of intensifying and accelerating existing trends.
Johann Rupert, the doyen of one of SA’s richest business families, recently told the Financial Mail that ‘this isn’t just a pause – it’s an entire reset of our economic system’.
It is not only economies that will be reset, but politics and much else.
With the reset, South Africa, like many other countries, will be poorer. Poverty will be greater and the middle class will be squeezed by the heavy destruction in the value of their assets, the erosion of their pensions, and likely higher taxes. The level of government debt around the world will have risen to levels unimagined a short time ago, with negative consequences for future generations. Central banks have injected historically unmatched liquidity into economies after over a decade of quantitative easing. At some stage this will translate into high inflation.
In this new environment, South Africa will have to fight for its economic survival more than ever.
The reset will involve taking vast swathes of the economy online. More education, medicine, retail, and work in general will be online. That has to mean fewer jobs.
The reset world will be less globalist, more populist, and one with fewer civil and economic liberties. States around the world have grabbed greater surveillance powers over the population under the guise of the public good of health. This will be maintained and extended. But states that have grabbed much power may also feel the wrath of their citizens at the ballot box or on the streets.
More immediately, there is as yet no convincing indication of the shape and nature of the recovery. After this unprecedented break, a switch cannot be turned on to restart the economy.
Governments have to come up with longer-term plans for the reset in a highly uncertain environment.
President Cyril Ramaphosa has made mammoth spending commitments and we do not know yet of plans for a New Social Compact between big business, the unions, and government that will bring about ‘structural reform’ and ‘radical economic transformation’.
As these two concepts might be viewed as diametrically opposed to each other, it is difficult to see real commitment to any deep growth-generating reforms. Government has now rejected the idea of a liquidation of SAA and is working towards the resurrection of a ‘national asset’. That could mean continued wasteful spending on bailouts, and raises the question: what reforms?
Government’s options are fast narrowing. The longer the phase-down in restrictions, the lower the growth, the larger the deficit, and the higher the funding requirement. Last week, Finance Minister Tito Mboweni said he had lined up $1bn from the New Development Bank (the BRICS Bank), $50m from the World Bank and $4.2bn from the International Monetary Fund. But will that be enough?
Even with these loans, the government will be forced to borrow for shorter periods, raising the risk of debt distress, and with that a larger financial crisis. And it may well have to extend its top-ups of grants and thus help raise further pressures.
The reform option would open the way to the really big money. In total, South Africa could borrow $19.6 bn from the IMF, with conditions such as making the minimum wage more flexible, selling off and liquidating state-owned enterprises, and lowering the deficit. That would also open the path for greater growth, revenue, and market borrowing.
As Government will fall short in its funding, the chances rise that it will have to raid foreign exchange reserves and introduce a ‘solidarity tax’ on high-net worth individuals. The next step would be getting the pension funds to buy more government debt – prescribed assets.
Rather than the big growth-enhancing reforms, Government might be thinking more of greater restrictions and impositions.
Last week, Mboweni proposed restrictions on the employment of, for example, Zimbabweans and Malawians by restaurants. This will probably go down well with the electorate as a sign that the government will help people get jobs. But if the Zimbabweans are here legally, or indeed have become South African citizens, this might be an infringement of their rights.
Government is also keen to bring the informal sector into the formal economy by insisting on bank accounts and tax numbers for them to operate. That would be justice in the case of larger entities, but it could make life tricky for the very small guys.
Part of the reset will involve governments around the world readying themselves for the next health or economic shocks. To do this, they will have to run government budget surpluses to build up a buffer to future onslaughts. Governments will take a lot of blame if they are not ready for the next big shock.
As the reset goes ahead, it is governments that might be the victims of their own actions.
In South Africa and other countries there are now strong signs that people will simply not tolerate long periods of lockdown. Those who go to bed hungry are fast becoming gatvol. According to a survey conducted by the University of Johannesburg and the Human Sciences Research Council (HSRC) earlier this month, 74 percent of those questioned think the President is doing a good job.
But, among those who go to bed hungry during the lockdown, only 34% backed the lockdown unconditionally, compared to 48% for those who had not gone to bed hungry.
The president has immensely strengthened his position during the lockdown. Anti-Ramaphosa ANC factions have gone quiet and the opposition parties have supported the lockdown. In charge are the National Command Council working in consultation with big business and the unions. Power has shifted from party and parliament to the executive and big business and big labour.
But things might still go awry as dissatisfaction with tight restrictions mounts, particularly if the promised alleviation measures do not work out as planned. That might well result in deep changes and realignments in our politics. The wider impact and response to Covid-19 has yet to play out.
The views of the writer are not necessarily the views of the Daily Friend or the IRR