Only a little while ago the economic concerns of South Africa were about load shedding and the worry was over the increase in half a percent to the government’s debt of 70% to the GDP. Today, with the coronavirus the fall out is anyone’s guess. With huge job losses and the effect on the health care service, how will South Africa emerge from this pandemic?
Even if the country emerges from this without huge numbers of fatalities and if the health system doesn’t completely collapse, can South Africa be revived? The unemployment rate will be off the charts and the economy will shrink exponentially. It is likely to be the most difficult economic year experienced in 40 years.
Revenue obtained via taxes will be next to nothing. Businesses and individuals are not bringing in enough money to be taxed and, at the same time, the government is giving big tax breaks to businesses in order to keep the economy from collapsing.
Some companies and individuals are fortunately still managing. There are a lot of online businesses functioning and keeping afloat. It is still possible to order, purchase and receive products via online sites and you can still enjoy playing on an online casino South Africa, for instance.
However, Eskom’s debts will increase further because of the lowering of electricity demands. And at a time when South African bonds have lost their investment-grade rating, the government is having to shell out more to deal with the crisis and will need to borrow more to cover services and wages.
At the same time, investors will expect higher interest rates on these bonds and therefore there will be less to put into the economy. South Africa’s debt burden will likely be around 91% of GDP by the year 2023. However, analysts are now saying that what was once 150% is now the new 100%!
The debts of other countries, of course, are also increasing dramatically as they need to pour money into their failing economies and health systems in order to overcome the virus. France and Spain expect their debt to GDP to be over 100% this year and Italy expects it to reach 160%. The United States has already reached these numbers and that is without an expected stimulus package of $2 trillion.
Unfortunately, South Africa will not receive the same flexibility as these European countries. We are already seeing the rand and its peers plummet because of worries about the ability of emerging markets to pay their debts. Most of South Africa’s debt is fixed in rand and not in dollars as is the case with many other countries.
Therefore, the effect of a currency crash will not have a catastrophic effect on South Africa’s debt burden as in other places. However, there is still some optimism that the government will be able to repay the money. At a recent government auction, the demand for bonds was far greater than the amount on offer. Hopefully, this is something that will continue in spite of the many changes occurring in the South African economy because of the virus.
Inflation, oil demand and interest rates
Just in the last month oil prices have dropped dramatically, almost 50%. The price now is around $30 and this is likely to remain the new base for the time being. It is very unlikely that with so little demand and so much oil available that the price will rise to anywhere near where it was. Oil is South Africa’s main import and therefore will benefit from this. So, in spite of the rand falling 20%, there is no inflation.
Falling fuel and transport prices which impact food prices greatly, and the lack of demand in the economy will produce zero inflation and lead to the introduction of lower interest rates. Many businesses, individuals and families will benefit from cuts in the interest rates that are likely to ensue. However, many companies may not be able to survive the crisis and will be forced to go bankrupt.
The South Africa Healthcare System
When this crisis is over there will likely be no money left for the ailing health system. All ambitious plans for healthcare will probably be shelved. But there has been cooperation between government and private companies during this crisis. Many private hospitals have been taking in patients with the virus and there has been a sharing of resources between them and the government.
Perhaps this is the new formula for the future? Maybe new relationships can be formed and those in the private sector may be willing to be more trusting of governments agendas. However, it is still early days and we are not at the end of this crisis. If this health crisis continues into the winter, there is no guarantee that the health system will not collapse under pressure.
South Africa- a banana republic?
South Africa is often thought of as an unstable country with people, and especially South Africans, having little confidence in the rule of law. But this view has been completely reversed in light of the response to the coronavirus. Like other countries, South Africa was also confronted with the enormous challenges presented by the virus. Notwithstanding the limited resources, compared to other countries, South Africa ‘s response was quicker and more resolute than many countries around the world. Many European countries, the UK and the United States delayed taking action and were quite late in calling for a national lockdown. Whilst some countries have still not done this and have incurred a high death rate from the virus.
South Africa’s quick response and in enforcing an early shutdown has ultimately saved many lives. It is good to know that in the event of a crisis the machinery of government can still work well. However, the impact of this shutdown on the economy is huge and it is the poorest who are suffering the most. The government is not working quickly enough to aid them.
Formalizing the economy
The government is interested in formalizing the economy and is taking advantage of this crisis to do this. All the new regulations and offers of help from the government are for those who are registered as legal businesses or “on the books”. So, any tax reductions, grants or financial payments are only given to those who have registered their businesses.
However, those running spaza shops are able to carry out business as long as they have permits. And if they register with SARS, they will be able to apply for government financial help under a new arrangement.
The government is also actively trying to make taxi services more regulated with the transport ministry offering to give financial aid via the unemployment insurance fund but only to those who are registered. This will, of course, impact the future of money raised through taxes.
Other factors causing change
The growth of the digital economy is one enormous change that is already taking place in South Africa. Businesses have had to get creative and enable workers to perform their tasks from home. As is the case with schools and churches who are doing long-distance learning and sharing online. Many companies are now using video and conference calls to do business that otherwise depended on spending huge sums on travel. This may become a new way of working and may lead to an increase in productivity.
The limiting of alcohol is likely to continue as there has been a decrease in crime, violence and traffic accidents since restrictions began. Problems of drinking are thought to be at the root of many of South Africa’s problems. An increase in those interested in learning the sciences and entering the medical profession may be one of the consequences of this pandemic and may encourage resource allocation in these areas.
This virus may also bring people to appreciate what they have in South Africa. They may not be in such a hurry to emigrate. This virus has made people reconsider where they feel secure and safe. Seeing how some of the wealthiest countries have dealt with the crisis has made people reconsider. Not to mention the fact that with the lack of air travel it becomes particularly difficult to be thousands of miles away from family, with little chance of visiting them when the need comes.