Treasury and private sector must pull out all the stops
Given what we know now — that there is to be a near complete lockdown of company operations and movement of people — SA’s GDP will probably contract as much as 4% in 2020 due to Covid-19.
This will result in about 1.7million jobs lost, concentrated largely in manufacturing (940,000); transport (300,000); mining (230,000); electricity, gas and water; and business services. GDP growth cannot be saved, but some jobs can, in highly uncertain conditions.
What is clear given our unsustainable fiscus is that there is little the government can do using the 2009 playbook to respond to the health crisis turned economic crisis.
The 2009 recession was a financial shock that spilt over into the real economy, leading to a collapse in demand. The economy did not go into lockdown, as it will from Friday. Deliberately, the incredible team at the Treasury at the time ran a budget surplus just before the crisis hit, which enabled a fiscal stimulus to boost demand. Coincidentally, we had a significant infrastructure build programme for the 2010 Fifa Soccer World Cup, which meant the stimulus found a ready space to fill.
The Covid-19 crisis is different: 2009 was primarily a demand shock, whereas this crisis is both a supply and a demand shock. While the 2009 recession was concentrated in a few sectors, the current crisis will have a negative effect on all sectors that are non-essential, which is more than 60% of the economy. If we simulate what this means for economic growth, assuming that some sectors such as tourism, hospitality, clothing retailers and a host of services that are also deemed non-essential are completely shut down for 21 days, first-quarter economic growth will show a contraction of at least 15% quarter on quarter and annualised. If the economy recovers into positive territory in the third quarter, economic growth for 2020 will be -4% or worse.
What can be done? From an economic perspective the toolbox needs to be expanded. The Treasury could grant tax holidays or tax exemptions to specific companies that meet defined criteria, such as the number of jobs and geographical location. Saving jobs must happen concurrently with tackling the underlying health issue. Geographical location criteria could be in line with the district economic growth model announced by President Cyril Ramaphosa.
Another possibility will be to issue a special bond for dealing with the health issues, financed by a temporary increase in tax in the future. The Reserve Bank has started a form of quantitative easing, essentially buying bonds in the secondary market. Perhaps the Bank must monetise the country’s debt to provide funding for the government. However, there must be clear accountability on how those funds are used, in a way that differs in all respects to the past decade where we increased debt but without much growth to show for it. Ultimately, society just has to agree that everyone — especially high income earners and asset rich South Africans — must contribute more to solving this crisis.
This is an unusual situation. Saving lives matters more than saving GDP growth, but that does not mean the economy must be left to collapse. Saving jobs can be achieved, but this requires the private sector to think beyond profits. It must not capitalise on the poor, who will be hardest hit. The stock market will recover eventually with all the stimulus, but timing it is not an investment strategy. Staying in for the long term is prudent.