On the 5th of March 2020, the first suspected case of covid-19 was reported in South Africa. As the days went by, the number of infections rose to 61and the President declared the outbreak as a national state of disaster. We have seen a significant rise in the number of infected people which led to an unprecedented drastic measure. Fast-forward to the 23rd of March 2020, the President announced the national lockdown with the aim of “flattening the curve” and stopping the virus from spreading. While the decision to lock down the country was well received by many South Africans, the lockdown does have dire consequences on the economy.
It is no secret that South Africa’s economy has been struggling for some time and has technically been going through recession. The Organisation for Economic Cooperation and Development has warned that the virus poses the biggest danger to the world economy since the 2008 financial crisis. Unfortunately this is a hard and bitter pillow to swallow for many South Africans and Africans at large: while we are all doing our best to flatten the curve, the economy is also “flattening”.
To date South Africa has recorded 1353 confirmed cases and the number of covid-19 deaths has risen to 5 (This is this morning, the 1st of April 2020), with a slowdown in global trade over the past month, the rand’s value is R17,95 to the United States dollar. It is expected that the rand will devalue further if the effects of a global recession sink into the already volatile economy.
South Africa’s economy has traditionally been rooted in the primary sector that includes mining and favourable agricultural conditions. However, of late South Africa has seen a structural shift in output and the economy has been driven mainly by the tertiary sector, which includes, but is not limited to, tourism. Among the key sectors that contribute to the gross domestic product and keep the economic engine running are manufacturing, wholesale and retail, financial services, transport, and communication. The lockdown has however seen a number of sectors/businesses close and these are businesses and sectors that contribute to the cycle of our country’s economy and the global economy at large.
Covid-19 has caused global stock markets to drop, commodity prices to tumble and we have seen the mining sector which accounts for a significant proportion of world production outputs globally take severe hits. It therefore is understood that the suspension of operations will adversely impact the production of South African mines and shareholders are therefore cautioned that production for 2020 may differ from previous guidance.
It must also be noted that not all is gloomy and dark in the mining sector as the Minerals Council South Africa stated in a weekend media release that while most of the mining sector has come to a halt, the mining industry could be an enormous asset in stabilising and growing the economy post the Covid-19 crisis. South Africa would need to adopt and implement a set of comprehensive structural reforms to materially improve the country’s competitiveness rankings, grow productivity and generate much higher levels of fixed investment. This simply means that the right economic and regulatory circumstances would have to prevail.
But what would the right economic and regulatory circumstances be? There has been talks about South Africa reaching out to the International Monetary Fund and World Bank. This essentially means that the International Monetary Fund will lend South Africa money and the International Monetary Fund will essentially “run” South Africa’s economy or, in more diplomatic terms, the International Monetary Fund will place South Africa’s economy under administration. This idea has not been welcomed by many of our politicians and a portion of our population has also reacted negatively to such a possible reality. Other South Africans – angered, concerned and frustrated with the electricity shortages, debates of land expropriation without compensation, budget deficits, political bickering, among others – believe that South Africa should reach out to the International Monetary Fund as the International Monetary Fund will bring the necessary economic reforms and that the ratings agencies would again take South Africa back to investment grade.
The tourism sector has been hit hard as international flights has been suspended. Tourism is regarded as a modern day engine of growth and one of the largest industries globally. However, measures to contain the virus, including travel bans have crippled supply chains, reduced output, hit commodities and the movement of goods and services that are not deemed essential have come to a halt. The supply of goods and services is impaired because factories and offices are shut and output falls as a result. But demand also falls because consumers stay at home and stop spending on goods and services that are not deemed essential.
It is clear that the Covid-19 pandemic will knock the South African economy. A burning question is whether Government, with the help of the private sector, will survive this recession and come out stronger, like we did in 2008, or whether it is more prudent to reach out to the International Monetary Fund and World Bank?