Past crises have all been rolled into one
Will this economic crisis be like the global financial crisis? The 1998 emergingmarkets crisis? The 1970s oil crisis? World War 2? The Great Depression?
The answer is: some elements of each. The financial system will come under intense strain, as in 2008, with a spike in bad debts. Emerging markets, including SA, will face intense funding and foreign exchange pressure, as in 1998.
The government financing outlook is like it was during the last world war with huge deficits. The demand shock is like that during the Great Depression as everyone stops spending at once. The 1970s oil crisis hints at the impact of the supply shock, though this time driven by broken supply chains rather than oil embargoes.
There is also a lesson from the dot-com bubble: the crisis will change how we use technology permanently, with winners and losers.
Each of these lessons provides clues to what the government’s policy response should be. The World War 2 lesson is to spend like there is no tomorrow. We will either survive this in some semblance of our existing economic and social structure or we won’t. If the latter, then the debt the government builds up won’t matter. The financial crisis lesson is do what it takes to protect the financial system. Inject liquidity into the system and use the buffers that were wisely developed after the financial crisis to ride through this one.
The emerging-markets crisis and the global financial crisis tell us we need international coordination, with developed countries using low funding costs to support emerging economies whose funding costs have ballooned. The depression era tells us that once the supply side starts to recover we need major stimulus to boost aggregate demand and get the economy going. And like after the world war, we will need to rebuild with major economic restructuring to grow the economy as fast as possible.
These may be policy moves that should be undertaken, but we live under constraints. SA lacks capacity and financial resources to mount the policy response it should be able to. Debt levels are already at record levels and its bonds are now junk rated. When the Covid-19 lessons are learnt in the wake of this crisis, one should be to not mess around in building reserves for difficult times.
If we were in the state we were in 2007, after several years of 5%-plus economic growth and a budget surplus, our economic response now could have been vigorous and extensive (as it was in response to the global financial crisis).
Because of our constraints, it has instead been tepid. In “normal” times we should build capacity into the system, spending on institutional readiness but also making sure we grab every chance to drive economic growth and improve government finances.
We also should do what we can to protect the economy during the crisis, without compromising in the health battle. Oddly, there is much more clarity on what to do when we get through the crisis than what we should be doing now. We do not really know how the crisis will play out in SA given its inequality and huge differences in resources. The playbook for this crisis has been written in Europe and Asia and only now are countries with highly dense, underresourced areas such as India and Brazil grappling with it. We are all having to learn on the job.
The political leadership offered by President Cyril Ramaphosa and health minister Zweli Mkhize has been robust in moving rapidly against the health challenges. We need to match that level of decisive action on the economic front. The measures announced so far, including tax holidays and liquidity measures from the Reserve Bank, are important but far more will be needed.
We must make difficult decisions on the details of the lockdown and what to do after it. What parts of the economy can we restart to be able to put food on tables, earn hard currency and deliver tax to the government? What risks are acceptable health-wise in restarting the economy?
We are far from alone in grappling with these questions. As statistics in Italy and Spain start to indicate a reversal in trends, they are wrestling with what to do next. Do you let those who have had the virus and now some level of immunity go back to normal while others are still quarantined? Do you risk importing new vectors of disease by restarting travel? Do you let some businesses reopen in areas that seem to have slower transmission rates?
As we struggle to find answers to these questions, the other side of this crisis will not be a clear finishing line. It will be a slow process of cautious changes. As we go, it is important for all of us to anticipate what economic policy moves will ease the financial consequences and create the most opportunity for everyone.