UK s Covid woes a ’ cautionary tale for SA

As officials at the Treasury scramble to find money to satisfy a political decision made to fund SAA at any cost, they may be looking at events in the UK with interest.

With the benefit of what is regarded as one of the hard currencies and a bond market that investors turn to as a safe haven in times of volatility, the UK was among the most aggressive in responding to the Covid-19 pandemic.

It introduced one of the most generous furlough schemes around, which entailed paying 80% of the wages of workers who had been temporarily stopped from reporting for duty, a move meant to protect jobs and incomes when much of industry was brought to a sudden halt in March.

The final cost has yet to be quantified, but the available data shows that it borrowed just more than £220bn (R4.8-trillion) in the first five months of this financial year, a figure the Financial Times said excluded expected losses on its version of the loan guarantee scheme. Its debt-to-GDP ratio is above 100%.

But that would not be obvious looking at that country ’ s 10-year bond yields, which on Friday were just 0.2%, compared with a punishing 9.5% for SA. The UK rate is headed for zero as traders anticipate the introduction of negative interest rates from the Bank of England (BoE) in response to the latest upsurge in infections and new lockdown regulations in parts of the country, including London.

The BoE was also among the most active central banks in responding to Covid-19, going as far as printing money to fund the government directly during the early days of the crisis. This raised eyebrows as a supposedly “independent ” central bank was caving in to government demands, just days after its governor, Andrew Bailey, had voiced opposition to monetary financing.

Here, the governor of the Reserve Bank, Lesetja Kganyago, has previously noted how SA had failed to fix the roof before the rains came, meaning fiscal policy did not have as much room as would have been liked when it was needed to support the economy and people’s incomes. As the pandemic approached, SA’s deficit was heading towards 7% and the country was a shoo-in for a credit downgrade, which came late in March, just as the economy was closing down.

The UK did not exactly fix its roof either ahead of the storm. But it can get away, at least for a while, with much more than SA. It benefits from its status as a Group of Seven country and the fact that it prints a currency that investors actually want to hold, despite its own problems, such as the impending Brexit disaster. So far from being punished for a runaway deficit, its bond yields have been falling.

Well, sometimes life just isn’t fair.

But even for rich countries, there are limits, and UK finance minister Rishi Sunak, whose stimulus measures included spending more than £500m to subsidise middle-class people’s meals at restaurants, started to look at ways to unwind the temporary ” measures. Only for the rain to return and force him to scrap his autumn (spring for us) budget and consider even more spending measures to support the economy.

The result is that the fiscal tightening has been deferred, though the job-retention and other measures announced last week were less generous.

The potential deepening of the recession means he may yet be required to provide more fiscal support.

As for Covid-19, the rain may have subsided in SA, but it would be foolish to assume that things will stay like that forever.

In the European summer months, the UK was celebrating signs that it was over the worst. There was even talk of Scotland being close to eliminating the virus, with new infections falling to single digits in early July. This weekend the country banned students from socialising and introduced other restrictions such as banning indoor visits between households.

None of this augurs well for SA and finance minister Tito Mboweni ’ s promise to rein in government debt. It has become a habit now that the minister’s budget statement is out of date in a matter of weeks. Based on downward GDP projections from bodies such as the Organisation for Economic Cooperation and Development, and the Reserve Bank, Mboweni ’ s already grim deficit projections in June are looking unrealistic in September.

The government’s decision to find R10.5bn to throw into SAA and the dismay it attracted have to be seen in this context. Perhaps the Treasury may find a fiscally neutral” way to do it, though “neutral ” seems hardly appropriate if the money has to be taken away from hospitals and schools. The message it is sending is that far from mending the roof while the rain has stopped for a while, we are making bigger holes.

While it is extremely unlikely that a lockdown anywhere near as harsh as was implemented in April will be tried here again, the economy could suffer yet more pain, even if that is just as a result of the global deterioration.

In that event, it is impossible to see the government being able to offer relief in anything like the amounts provided so far. The stimulus has not been insignificant, regardless of the scepticism over the package not being anywhere near the R500bn headline number.

But what is clear is that the rains will come again and there will be pressure on the government to spend and borrow more, despite the bond market telling us it has already run out of options. For the next crisis, the roof will not just be leaking, it will be completely gone and the government is not going to be able to support the poor and the vulnerable.

Will it be enough to tell them that at least they have a national airline?

THE RAIN MAY HAVE SUBSIDED IN SA, BUT IT WOULD BE FOOLISH TO ASSUME THAT THINGS WILL STAY LIKE THAT FOREVER