Macroeconomic impact of COVID-19 pandemic in SA

South Africa should not have undertaken a wholesale one-size-fits-all lockdown of the economy that commenced on 26 March 2020 in response to the spread of the novel 2019 coronavirus (COVID-19). Government should have taken into account the geographical spread of the pandemic across the country and all relevant trade-offs. Instead, a populist approach was adopted.

These sentiments were expressed by Macroeconomics Research Unit (MRU) economists at the University of KwaZulu-Natal on Thursday, 28 May 2020, during a Zoom discussion forum.

Rethabile Nhlapho, from the discipline of Finance, and Devon Windvogel, from the discipline of Economics, both lecturers from the School of Accounting, Economics and Finance at the University of KwaZulu-Natal, were the guest speakers of the session.

While Nhlapho presented on the impact of the COVID-19 on financial markets, Windvogel focused on the impact of the pandemic on the existing South African institutional constraints that have hampered the integration of the black majority in the post-apartheid period, including lack of entrepreneurial and managerial capacity and the strong South African labour movement.

Following the spread of COVID-19 from China to various parts of the world in the first quarter of 2020, South Africa responded by implementing a level five national lockdown, effective 26 March 2020, with the intention of minimising the spread of the disease. The economists, however, generally agree that the South African economy will be adversely affected in the short, medium to long run, not necessarily because of COVID-19, but because of the nature of government's response.

While South Africa's gross government debt-to-GDP ratio was roughly equal to the emerging market economies' average in 2019, the domestic debt trajectory is seemingly at risk. South Africa's public debt (as a ratio of GDP) increased by 33 percentage points between 2008 and 2019. At the beginning of 2020, projections pointed to a further increase in the debt stock, from the current level of 61.6% of GDP, to 71.6% of GDP in 2023. However, the debt stock is likely to increase much faster than anticipated in light of the fiscal stimulus measures as announced by the National Treasury in April 2020 aimed at mitigating the economic impact of the lockdown. According to International Monetary Fund (IMF) projections, the gross government debt-to-GDP ratio will reach 85.6% of GDP by the end of 2021.

As the debt service cost of government continues to increase, which accounts for 13% of government expenditure and 16.4% of revenue in the 2020/21 budget, the National Treasury projects that the debt service burden will rise to 15% of expenditure by 2023 as interest payments are the fastest-growing component of the budget. As pressure on the fiscus increases, the rising interest bill is likely to crowd-out other social and investment spending priorities. This, in turn, may adversely affect longer-term economic growth prospects, as improvements in the provision of health care, education and infrastructure provide the basis for future GDP growth. Once COVID-19 has been contained, a growth-friendly fiscal consolidation will be necessary to address the rise in public debt. If government debt continues to increase unabated, government may face debt service challenges, which could have serious implications for financial stability.

Before the pandemic, the South African economy had been grappling with continuing deterioration of fiscal strength and a structurally weak growth. The country's GDP growth slowed from 1.3% in 2017 to an estimated 0.7% in 2018 (StatSA, 2018). As a result, the country was downgraded into a full junk status or below investment grade in 2019. The outlook on the rating remains negative because of unreliable electricity supply, persistently weak business confidence and investment as well as long-standing structural labour market rigidities that continue to constrain the country's economic growth. Relatedly, the country's debt profile has also been a source of concern for policymakers as the most recent estimate puts the debt service-to-revenue ratio at 62.2%, which is likely to worsen and may reach 70% at the end of 2020 (Bloomberg, 2019).

These factors will aggravate the economic impact of the country's response to the COVID-19 outbreak and make it more difficult for the government to weather the crisis. With the total lockdown, the local unit exchange rates surrendered 3.2% against the United States dollar (dollar/rand: R17.55), 4.25% against the pound sterling (pound/rand: R21.66) and 4.8% against the euro (euro/rand: R19.49). The Johannesburg Stock Exchange, like other global markets, was also under pressure, down nearly 6% to 48.99 points within the lockdown period. The IMF and South African Reserve Bank project that the country's GDP will shrink by approximately 6%, which effectively places over 1.5 million South African jobs at risk (IOL, 2020).

In order to ease the afflictions imposed by the lockdown, the South African government implemented a wide range of initiatives aimed at keeping both households and businesses afloat. However, the question remains: how effective are these initiatives? From our viewpoint, everything about government's response points towards adversity characterised by high and prolonged levels of unemployment. What happens when the business loans are dried out? What happens in October when the social relief of distress grants end?

Inevitably, the reality will eventually hit the economy. After the lockdown, some jobs that may have survived the period of significant economic inactivity might be lost when demand is sustained at a low level. This is the primary reason why some scholars support Professor Larry Wray's (of Levy Economics Institute) view that government should be the employer of the last resort. This class of scholars argue that instead of relying on implicit policies of employment, government must provide jobs to anyone willing to work at a minimum wage. In this manner, there will be no involuntary unemployment. Aspromourgos (2000) advises that this should, however, not be implemented as typical public sector employment, but rather as residual employment, such as community work, environmental work, etc, contingent on preferences of the society.

In South Africa, this is closely related to the Expanded Public Work Programme (EPWP) - except this would need to be run more efficiently. This proposal could possibly work better in the country, which has been battling with unemployment for a very long period of time. And it will also go a long way in alleviating the expected rise in unemployment levels. In addition, it will absorb the current crop of graduates, who now have a lower chance of getting employed (because of the expected prolonged economic slowdown) than was the case below the lockdown.

The Macroeconomics Research Unit (MRU) is a research initiative within the University of KwaZulu-Natal's (UKZN) School of Accounting, Economics and Finance comprising of academics and post-graduate students whose mission is to advance and develop research in this field.

Compiled by By Christian Tipoy, Ntokozo Nzimande, Malibongwe Nyathi, Harold Ngalawa, Simiso Msomi and Adebayo Kutu on behalf of the Macroeconomics Research Unit, UKZN.