The coronavirus and the economy

1 April 2020

We have seen quite a lot of commentary advocating fiscal measures to combat the spread of coronavirus, to provide services for those infected, and to counter the impact of the coronavirus on the economy. While no-one can articulate a fully worked out set of proposals, and their costs and financing, in a rapidly changing situation, we publish this brief to indicate principles we think should guide thinking about the relationship of the epidemic and the economy. These principles are as follows:

1. First, and foremost, we believe that the government should do everything possible to slow the spread of the coronavirus (‘flatten the curve’) to assist the infected, and to assist people to cope with the adverse effects on their livelihoods. In order to maximize government achievement, it must be recognized that there are limits to the rate that administrative capacity can be developed, that this capacity has to be financed by the National Treasury which already has to struggle with a difficult fiscal situation, and that new capacity needs to be deployed on the ground. This entails prioritization and effective planning. We would welcome government communication about the progress it is making, and how and when people are expected to respond to new initiatives, in terms of making claims on them.

2. We think it entirely inappropriate for anyone to try and leverage the coronavirus crisis to press for their favourite general public policy positions, especially if they are hugely expensive (for instance, a basic income grant) or would have detrimental consequences in the short and medium term (such as demands which are unsustainable in macroeconomic terms). While many proposals which have been put forward over the past few days may seem attractive at first glance, especially if money is to be put in people's pockets, they ignore the reality of the government's financial position. In everyday language, the government's position is that of a private household which has maxed out its credit card and now suddenly has to pay to repair the house's roof which has collapsed in a storm. The government's annual debt service is already at R230bn (Treasury's 2020/21 estimate, as published in the 2020 Budget Review), which is the same as its health budget. If debt is increased further, it means that interest payments have to increase, which in turn leads to funds being taken away from operational budgets to fund that rising interest expense. The only alternative is that debt increases further to pay interest on the debt, which leads to debt spiralling out of control. Look no further than Eskom to see the process at work. The focus should be on what needs to be done here and now.Make no mistake: the impact of the coronavirus and the essential measures to combat its effects will stretch an already weak economy to its limits. Broader public policy debate can be resumed when the crisis is over.

3. We believe that it would help stabilize expectations, and hence the economy, if government publishes estimates of the cost of its programmes and the way in which these costs will be financed, to the extent possible. For instance, the Reserve Bank could publish the extent of its acquisition and disposal of government bonds week by week, the National Treasury and the South African Revenue Services estimates of foregone revenue as a result of tax concessions, the Department of Health estimates of the costs of new health programmes, the Unemployment Insurance Fund the demands on its reserves, and the National Treasury revised projections of the Public Sector Borrowing Requirement. The more transparent all this is, the lower will be unfounded anxieties about the fiscal position. Moreover, the private sector should communicate as well. For instance, the banks could produce accounts of how the coronavirus is impacting on their positions.

4. We welcome the establishment of the Solidarity Fund and encourage donations to it. The Fund will focus efforts to combat the spread of the virus, help us to track the spread, care for those who are ill and support those whose lives are disrupted by the nationwide lockdown. Donations can be made by visiting www.solidarityfund.co.za. We support efforts to disburse this Fund usefully as soon as possible.

5. We support developments in monetary policy, but warn that it should be conducted with circumspection. The repurchase rate has recently been cut with a strong influence on short term interest rates. The Reserve Bank is also providing liquidity where needed across the yield curve, which sets out interest rates of bonds with varying maturities. We should not take our monetary policy cues from European countries with very low, zero or negative interest rates. Our situation is different and needs to be handled differently.

6. A more imaginative use of funds from institutions such as the Public Investment Corporation and the Industrial Development Corporation should be implemented. The intent would be to assist listed and unlisted companies which have temporary cash flow problems arising from the current situation. The institutions should put in place an expedited mechanism of taking up shares in these companies. Shares would be bought at current depressed levels, in the expectation that when the crisis is over, they can be bought back by the company in question, when its finances are healthy again, or sold in the market. The institutions who are providing the funding would therefore look at making a profit when things return to normal, to recompense them for the risk they are taking. Companies themselves would not face further burdens on their finances by paying interest on loans and on having to repay the capital on those loans in due course. Shareholders in these companies would have to accept that they are potentially reducing their interest in the business, but after all, they have the option to put that money in themselves. In the end, such a mechanism presents a good mix of risk and reward for both the company and the funding institutions and does not place unnecessary cash flow burdens on the companies involved.

7. Since social grants will become more important to the survival of poor households, we urge particular attention to their administration. In particular, we would like to see that these grants are made through bank accounts as far as possible, so as to minimize health risks from queues at cash distribution points. All efforts by banks to facilitate electronic transfers are welcome.

8. We welcome the fact that the International Monetary Fund appears willing to assist countries finance costs associated with the coronavirus epidemic. The Minister of Finance has said that he is willing to keep this option ‘in his back pocket’ and we believe that contingency plans should be prepared to activate it if it becomes necessary. Whether it should be activated depends on the terms offered by the IMF and the costs of not accepting the assistance.

9. Deng Xiaoping once famously said that one should cross the river by feeling the stones. This maxim should be applied to understanding the economic impactof the coronavirus on the economy. There is nothing for it, but to wait for the release of economic data, bit by bit, and to endeavour to understand how the economy is evolving. However, a piece from the Brenthurst Foundation is worth reading for its list of points to consider: How much could Coronavirus affect the South African economy? A preliminary estimate (Daily Maverick, 27 March 2020, available at https://www.dailymaverick.co.za/article/2020-03-27-how-much-could-coronavirus-cost-the-sa-economy-a-preliminary-estimate

By Charles Simkins, Head of Research, HSF, 1 April 2020