SA economy crashes to below 2008/09 crisis levels

14 June 2020

Crucial reforms still lacking 

The South African government’s legislative reaction to Covid-19 has been an acute shock to the economy. This follows on an economic policy environment which has steadily worsened through the course of 2020. Both the Zuma administration and the Ramaphosa administration (to date) have failed to implement  market reforms to turn the tide of economic decline.  

South Africa is, at present, in far worse state than was the case even during the economic crisis of the late 2000s. In the coming period, the nature of policies that remain in the wake of Covid-19 and steps toward reform (or lack thereof) will be crucial to the welfare of all communities in South Africa. 

These are some of the findings in business group Sakeliga’s quarterly Economic Update for Business Decision-makers, published today in collaboration with ETM Macro Advisors.  

The June report illustrates the severe degree to which South Africa’s stringent lockdown has affected business trading conditions, with some indicators showing a worse decline in April 2020 than was experienced during the late-2000’s financial crisis.  

The report emphasises that a quick reversal of the stringency of the local lockdown regulations remains a critical element for the likelihood of a meaningful economic recovery after Covid-19.  

“The second quarter of 2020 was unprecedented in many respects. South Africa’s business conditions were already weak even at the start of 2020, but South Africa’s excessively strict and protracted lockdown has had a severe impact on many enterprises. Although some lockdown measures were eased in June, allowing more business activity to resume, many enterprises, such as in tourism, for example, remain prohibited from trading,” says Gerhard van Onselen, senior analyst at Sakeliga.   

Employment 

The report notes the especially concerning state of affairs for employment and estimates that job losses may amount to between two and three million people during the lockdown. “We do foresee recovery in employment in June from the depressed levels from April and May, but it will not be an easy recovery. Unemployment was already extremely high before Covid-19, and job market indicators are currently very weak. Many employers are unable to expand their workforces, and we are seeing business closures among our members.”   

“Experience from countries coming out of lockdowns, such as China, indicates that much economic activity will struggle for some time to recover to pre-Covid-19 levels, especially if businesses are confronted with the possible reinstatement of stringent lockdown measures.”  

State budget 

Another area of concern noted in the report is the state of the government’s budget and deficit. The lockdown has increased pressure on tax revenues, while pressure is mounting for the state to spend in order to help households and businesses. It appears that tax revenues may decline by around R300 billion this year.    

“At this stage, new government borrowings and continued interest expenses on borrowings are nearing 40% of total government expenditure. This figure could easily exceed 50% of total state expenditure at the current trajectory. Where such ratios exceed 40%, it could be a danger signal of a looming fiscal crisis.”  

The report also updates the presidential policy scorecard, a composite index that attempts to measure the impact of a current presidential administration’s economic policy choices against a number of economic measures, including employment, currency, bond yields and investment. In May, the current administration scored 30/100 on this measure.   

“Covid-19 and the government’s legislative reaction has been an acute shock to the economy, and the economic policy space worsened even more since the start of 2020. Both the Zuma administration and the Ramaphosa administration to date have not implemented the necessary market reforms required to turn the tide of economic decline. In the coming period, the nature of policies that remain in the wake of Covid-19 and steps toward reform (or lack thereof) will be a crucial determinant of the welfare of all communities in South Africa,” Van Onselen concluded.  

Read the full report here.

Issued by Gerhard van Onselen, Senior Analyst: Sakeliga, 14 June 2020