The scale of the economic devastation from South Africa’s severe lockdown regime is fast becoming apparent.
The longer and tighter the lockdown, the more the business failures, the higher the unemployment, the greater the economic downturn, the weaker the recovery, and the deeper the human misery. And the less progress on the big reforms of cutting back government and freeing the economy, the more the recovery will be hampered.
Increasing numbers of people are going hungry. News24 warned in Covid-19 Chronicles: Country’s poor on brink of starvation of the growing possibilities of food riots. ‘Volunteers working in poor communities have warned the country could descend into chaos unless more is done – urgently,’ it reported.
Health Minister Zweli Mkhize has said a statement by Dr Glenda Gray, who chairs the Medical Research Council, that there were now admissions for acute malnutrition at Chris Hani Baragwanath Academic Hospital is without foundation.
There is immense uncertainty about what happens when a substantial part of an economy is forced to shut down, but an unprecedented economic downturn is almost certain.
Last week, Investec’s Chief Economist Annabel Bishop warned that the decline of the economy was feeding upon itself and endangering a recovery.
Investec’s model shows that there is a heavy risk that the economy could contract by up to 15 percent this year. In the model, the economy is forced into a far faster decline due to the lockdown.
This is in the region of a forecast put out by Business For South Africa (B4SA), which brings together Business Unity South Africa and the Black Business Council to address the Covid-19 crisis. This predicted a decline of up to 17 percent. The range of outputs in both models depends on the severity and duration of the lockdown.
Just a month ago, the Bloomberg consensus forecast for South African growth was a contraction of 5 percent. The Reserve Bank is due to give an updated forecast later this week when the Monetary Policy Committee issues its statement.
Entering a negative spiral
With a lockdown, the economy is entering a negative spiral. In a note to clients, Investec’s Annabel Bishop wrote: ‘The situation is even more dire as the economic effect of a lengthy lockdown will be geometric not linear – that is, it will cause an increase of cascading negative effects as households and corporates run out of savings and run up debt. The collapse will become bigger as it feeds off itself.
‘The longer the severe lockdown persists the quicker the number of business failures will escalate. This applies to unemployment too.’
South Africa is entering a spiralling negative cycle through knock-on effects. Some companies have permanently shut down, others face reduced business, workers are laid off or face pay cuts, and demand is reduced in the economy. With each step multiplying throughout the economy due to the lockdown, the knock-on effects speed up.
Bishop warns that the longer the lockdown, the weaker the demand will be on a full reopening of the economy, as consumers’ ability to spend has been eroded. Demand will significantly lag behind the reopening of the economy.
She is particularly concerned at a BankServAfrica report showing the actual value of transactions being the lowest in 14 years, ‘which means the SA economy will have lost the advances it has made over the last 14 years’.
The fragile position of many businesses came across in a StatsSA survey on the impact of Covid-19 on the economy. Of those surveyed in the first two weeks of April, 54 percent said they would cease to exist before mid-July if they could not generate sufficient turnover. About 36 percent of businesses in the survey had already laid off staff and 46 percent expected workforce cuts in May. And 15 percent of the firms surveyed said above 80 percent of their workforces had been laid off.
Enormous economic waste
This is an enormous amount of economic waste, in the face of much expert medical opinion saying the lockdown is not curbing the spread of Covid-19. Expert medical opinion and organised business want the lockdown regime eased or lifted entirely. Close to two months of lockdown have seen Covid-19 incidence and deaths rise, and there is still an anticipated surge in a few months.
Government speaks of following World Health Organisation guidelines, but has not made public its model, or the criteria it will use to allow the country to enter into a less rigid lockdown.
Business, or at least B4SA, wants a move to Level 2, under which the economy can to a large extent return to normal with inter-provincial travel allowed, with social distancing and bans on large groups.
By the end of May, government will probably put most of the country on a Level 3 lockdown, but parts of the country where the disease is rampant might remain on Level 4. That would continue to disrupt supply chains and the movement of people to and from work, and leave the economy shackled. Besides, ‘epicentres of the disease’ could be a reflection of an ability to roll out testing in an area, more than anything else.
Gauteng Premier David Makhura rejected the idea of varying lockdowns by region in Business Day. ‘In Gauteng,’ he said, ‘you can’t have level 3 in Ekurhuleni and level 1 in Johannesburg and level 2 in Tshwane. We are an integrated city region. People move; they work and live in these spaces simultaneously.’
Early in the lockdown, President Cyril Ramaphosa said plans for structural reforms and radical economic transformation would be forthcoming. How two opposite concepts can be meshed into a cohesive policy remains an open question.
No hint of reform
There is currently no hint of reform, although the Covid-19 crisis has presented an enormous opportunity to go for the Big Bang approach to making changes.
Indecision appears to reign. There have been no decisions over the future of South African Airways. All signs are that government is trying to remain true to ideology and its union allies and resisting any idea of a sell-off or liquidation. And Treasury’s proposals for growth-generating reforms to network industries appear to have been forgotten.
Post-lockdown, there will be a test of whether Eskom has used the respite to do maintenance. And when a fresh crisis budget is presented, any justification for continued protection of civil servants and subsidised state-owned enterprises from economic reality has to fall away.
But where will the pressure for reform come from? Finance Minister Tito Mboweni is undoubtedly a very lonely torchbearer in government.
As the economy heads into new and unprecedented lows, will business speak its mind?
There are fresh signs that business has had enough and gained courage in recent weeks. Listen to Busi Mavuso, the head of Business Leadership South Africa: ‘We need to be thinking about the recovery and what forms of policy reform will give us the best shot at rebuilding and growing the economy in the longer term,’ she wrote earlier this week in a newsletter.
The views of the writer are not necessarily the views of the Daily Friend or the IRR