State is polishing cutlery on the Titanic

Over the past month numerous advanced and developing economies have announced comprehensive public health and macroeconomic measures to reverse the outbreak of the coronavirus pandemic and counter its devastating economic effect.

But President Cyril Ramaphosa’s address to the nation on Sunday treated the situation as just a public health crisis and failed to provide macroeconomic measures to avert the disaster scenario facing the economy ahead of a possible downgrade to junk status next Friday.

Ramaphosa said the government would announce fiscal measures to support the economy after consultation with business, labour and other stakeholders, and they were in an urgent meeting at the National Economic Development and Labour Council (Nedlac) on Monday afternoon.

But after two hours listening to the cabinet briefing on the government response to the pandemic on Monday morning, I decided I had had enough.

As ministers provided excruciating details about issues that had no bearing on the looming economic crisis, it felt like they were busy polishing the cutlery on the Titanic while it was sinking. Finance minister Tito Mboweni said he could finance the proposed fiscal measures by cutting elsewhere.

This is likely to mean reduced allocations to state-owned companies, social spending and crucial infrastructure budgets over the next three years.

The global response to the economic effect of the virus started in Asian countries that have close links to the Chinese economy, which announced fiscal stimulus packages worth about $80bn. These included South Korea ($13.7bn), Thailand ($12.7bn), Malaysia ($6.6bn), Singapore ($4.6bn) and Indonesia ($725m).

In Malaysia and Singapore, the governments plan to increase the size of their stimulus packages. Malaysia, Indonesia, Hong Kong, Thailand and the Philippines have also cut interest rates.

During March the US Federal

Reserve announced two emergency interest rate cuts of 150 basis points to a range of 0%-0.25% and plans to resume quantitative easing (QE) that will pump $700bn into the economy.

The European Central Bank (ECB), which already has negative interest rates, announced QE of $134bn and plans to provide banks with cheap money to lend to small businesses. The UK announced a co-ordinated package that included an emergency interest rate cut of 50 basis points and a fiscal stimulus of $38bn. Canada, Australia and New Zealand also cut interest rates. Quarantined Italy and Australia announced fiscal stimulus packages of $28bn and $17.6bn, respectively.

We have now probably reached the end of a threedecade era of central bank independence. With many country’s central banks now at or near the 0% lower bound, there is limited scope for further interest rate cuts. I predict that within weeks the Fed or another big central bank will announce a joint operation with the government to implement a helicopter drop: fiscal stimulus financed by the central bank (monetary finance) to revive the economy.

SA is in a deep crisis. Lest we forget, the country was already heading towards a third consecutive quarter of declining GDP during the first quarter of 2020, partly due to continued load-shedding. Now the black swan from Wuhan will result in a decline of world GDP during the first quarter. This is likely to push the SA economy into its third recession in three years.

Reserve Bank governor Lesetja Kganyago will have to announce an emergency interest rate cut of at least 200 basis points.