South Africa’s Gross Domestic Product (GDP) could contract by as much as 16 percent if the Covid-19 pandemic is not contained before the end of this year.
This includes investment falling by over 33 percent, imports by 22 percent while exports could be down by 20 percent. This is according to Treasury Director-General, Dondo Mogajane who was briefing a joint meeting of the Finance and Appropriations committees of the National Assembly and NCOP.
He says government has put together an intervention package totalling a billion rand over the next 18 months.
“Over the longer term we cannot return the economy to where it was. It is going to be long, tough and it’s not going to be easy. We have to forge a new economy. This will require a new contract between business labour and the community. We have to implement far reaching reforms to enable South Africans to participate in build a more prosperous society.”
Government expresses disappointment over S&P downgrades
Government expressed disappointment over global ratings agency S&P to lower South Africa’s long term foreign and local currency debt ratings further into non-investment grade to ‘BB-’ and ‘BB’ respectively.
The agency revised the outlook to stable from negative.
According to S&P, the downgrade is a result of coronavirus related pressures that will have significant adverse implications for South Africa’s already deficient growth and fiscal outcomes.
The stable outlook reflects the balance between pressures related to very low GDP growth and high fiscal deficits against the country’s deep financial markets and monetary flexibility.
“Government however says it welcomes the revision of the outlook to stable from negative, and considers this an indication that the agency at least recognizes some of government’s fiscal and monetary policy measures as strong points,” reads a statement issued by National Treasury.
It further adds that “Government continues to prioritise measures announced by President Cyril Ramaphosa aimed at containing the spread of the virus and further acknowledges the negative impact COVID-19 has had on economic activity.”
Responses to the coronavirus pandemic
In further responding to the COVID-19 pandemic, government announced a fiscal package amounting to R500-billion.
President Cyril Ramaphosa announced a gradual reopening of the economy from 1 May 2020, under strict conditions.
This means that some businesses will be allowed to resume operations subject to extreme precautions to limit community transmissions and outbreaks.
“Now, more than ever, structural reforms need to be urgently implemented in order to get the economy moving in the right direction. Tough decisions have to be made and collaboration between government, business, labour and civil society remains vital in order to contain the spread of COVID-19 and ensure sustainable economic recovery,” says Treasury.
— Presidency | South Africa ?? (@PresidencyZA) April 25, 2020
What are some of the reasons behind S&P’s decision?
- South Africa’s already contracting economy will face a further sharp COVID-19-related downturn in 2020.
- In the second half of 2019, the economy shrank, due partly to a set of severe rolling power blackouts.
- Its fiscal deficits will remain elevated, and the cost of servicing rising public debt will increase to about 6.5% of GDP by 2023.
- Contingent liabilities from state-owned enterprises constitute a significant additional risk to the public balance sheet. Stress is most extreme at South African Airways (SAA), which was already restructuring and appears unlikely to survive without new cash injections.
- State-owned power utility Eskom will likely face near-term liquidity challenges in light of lower energy demand throughout the lockdown.
- S&P Global Ratings further said Covid19 broader economic impact for South Africa will be very difficult to handle, as South Africa entered the crisis from a weak fiscal and economic position.
- In addition, a significant planned saving in the 2020/2021 budget was a politically contentious reduction in public-sector wage hikes, which is estimated to save R160 billion but is being challenged by powerful unions.
Warning to South Africa
S&P said it could lower the ratings again if South Africa’s economic prospects fail to recover during the forecast period and financing pressures mount.
It said it could also consider another downgrade if the rule of law, property rights, or enforcement of contracts were to weaken significantly, undermining the investment and economic outlook.
What to do to be upgraded
S&P says it could raise the ratings if the government’s reform efforts were to credibly arrest the rise in the government debt-to-GDP ratio.
An upgrade could also occur if there is a substantial improvement in job creation and productivity gains, leading to higher real per capita GDP growth.