Can South Africa weather the COVID-19 storm?
Summary and Assumptions
• Emerging Markets: As the COVID19-induced global economic chaos intensifies, there has been an even greater shift of capital from emerging markets to countries considered safer as investors are becoming more risk averse. This, together with the steep contraction in economic activity, has resulted in more volatility of emerging country exchange rates including South Africa’s.
• South Africa’s growth: The latest IMF World Economic Outlook forecasts the global economy to contract by 3% in 2020 because of the fallout from the COVID-19 pandemic. This, together with South Africa’s pre-existing deep structural issues (including inadequate infrastructure), as well as the economic impact of the 35-day country lockdown that has been relatively aggressive, South Africa’s economy is going to be hit hard in 2020 and a recession in inevitable. Minister of Finance predicts a GDP contraction of closer to 6.5%.
• Business confidence and business health during COVID-19: Business confidence index reached a 21-year low during the first quarter of 2020. Furthermore, a business survey on the impact of the pandemic shows that businesses have already been profoundly affected. It indicates that 85.4% of responding businesses had turnover that was lower than their normal range.
• Unemployment: South Africa’s chronic unemployment shows no signs of declining. Many South African businesses are already struggling and this is going to result in thousands losing their jobs because of the COVID19-induced economic crisis. Surveys already show that many businesses expect to decrease their workforce. At the same time, many businesses are expected to go under.
• Inflation: South Africa’s consumer inflation has been moderating due to muted domestic demand. A lower inflation rate recorded in March 2020 from February.
• Interest rates: With the intensification of the COVID-19 pandemic, the South African Reserve Bank cut the benchmark interest rate by 100 bps during the Monetary Policy Committee’s (MPC) end-March meeting, and by another 100 bps during an unscheduled meeting during mid-April. We expect further cuts of at least 50 bps before the end of 2020.
• Fiscus: The South African “actual budget” is deviating substantially from the February Budget Speech. This is because government revenue is expected to be negatively affected by the impending contraction in GDP growth in 2020, while at the same time expenditure requirements have risen substantially.
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