SA can’t pull itself up by its bootstraps – there’s no money

By Marelise van der Merwe for Fin24

South Africa is likely to see long-term economic damage and “deep scarring” on unemployment numbers unless urgent reforms are implemented to attract foreign investment and improve ease of doing business.

This is because there simply isn’t enough money available locally for the country’s recovery to be driven by domestic consumption, according to Dr Morné Mostert, Director of the Futures Institute at Stellenbosch University.

Late in April, President Cyril Ramaphosa announced an unprecedented R500 billion support package aimed at mitigating the impact of the coronavirus on South Africa, with Finance Minister Tito Mboweni expected to be ready to table his adjusted budget after 24 June. R130 billion of the package will be supported by reprioritising funds from South Africa’s existing budget, while the rest must be funded externally.

That’s for the current year. The next remains to be seen.

In Mostert’s view, the Level 5 lockdown was initially successful, but the lifting of restrictions has been hamstrung by a focus on minutiae at the expense of a long-term recovery strategy. The key to a recovering job market lies in attracting foreign investment and improving ease of doing business, he argues, “not whether we can or cannot buy open-toed sandals”.

South Africa – like countries across the world – has seen job losses and a reduction in working hours since the start of the pandemic. Estimates for April suggested some 20 000 jobs were shed.

But SA is not alone. Elsewhere, there have been similar or even steeper declines. For the past nine weeks, the United States has filed a record number of unemployment claims, erasing the gains of the last decade and bringing the total to over 38 million jobless.

Economies that have historically boasted the lowest unemployment rates are beginning to waver – from Australia to the UAE and Thailand. Canada’s unemployment rate spiked to 13% in April of 2020 from 7.8% in the previous month. Jobless claims in the UK jumped 70% in April. China’s unemployment rate, described by critics as “suspiciously stable”, has been called into question in recent weeks.

The International Labour Organisation (ILO) has warned that nearly half of the global workforce is in immediate danger of losing their livelihood. That’s 1.6 billion workers worldwide. The first month of the crisis saw an estimated drop of 60% in the income of informal workers globally, while worldwide, over 430 million enterprises faced high risks of “serious disruption”.

This is bad news for South Africa, whose long-term prospects for economic recovery depend to no small extent on its attractiveness as a destination for foreign investment as well as the resilience of its trade partners.

The wellbeing of the US consumer, in particular, has a widespread knock-on effect, says Maarten Ackerman, Chief Economist at Citadel.

“The US is still the biggest economy, and the US consumer is still, to date, the most important consumer. Their consumption spending is significant,” he says. “If they are going to remain sick for much longer, that is going to have a big impact on not only SA, but the whole world.”

China, as a key trading partner for South Africa, has shown some resilience – which is good news, says Ackerman. But South Africa’s trade relationships with its African neighbours are also significant, so the economic recovery of the rest of the continent, as well as implementation of the African Continental Free Trade Agreement, remain critical.

As for the US, its sustained job losses are in line with what was seen during the Great Depression, which is bad news for spending power. Moreover, according to Mostert, the strategic response to Covid-19 in the US has also “created havoc”, with global knock-on effects.

A prolonged recession is more likely than a depression, because a major structural shift in employment is unlikely, Ackerman says – meaning jobs will not be permanently destroyed.

But the concern is that comparing cycles – the Depression, the Recession of 2008, and the coronavirus crisis – indicates that while the current decline is extremely steep, during each cycle, recovery has taken longer.

“Getting 50 million people back into the employment sector will take a lot of time,” he says.

Tough times ahead for SA

South Africa faces its own complexities. Its labour market is less flexible, which has its advantages for the consumer, but can also signal challenges for recovery down the road.

“The US has one of the most flexible economies in the world. They very easily fire people, but hire them again when the economy picks up. Companies can get lean and mean very quickly,” Ackerman explains. This is not true of South Africa, which means there may ultimately be fewer jobs lost, but these could be permanent.

“There are a couple of [estimates] but depending on how long the lockdown continues, we could have 3 – 4 million people losing their jobs that will push unemployment close to 50%.

“Unfortunately, in our case, some of that damage will be more structural,” Ackerman says. “It will be difficult to replace those jobs and get those people back into employment. We entered this in a recession and may lose some companies as a result.”

The other difficulty in South Africa is that many of its people are already struggling financially, employed or not. This bodes ill for both individuals and economic recovery overall.

Credit bureau TransUnion’s Financial Hardship Survey has been monitoring the impact of Covid-19 on consumers across the globe. Its latest South Africa Report suggested that while a comparatively smaller percentage of South Africans had, as yet, been impacted by the loss of jobs than in the United States and United Kingdom, their concerns over making ends meet were already even greater.

The South African report for the week of 4 May noted that while the minority of respondents had lost their jobs, the majority (82%) had had their household income impacted. There was an average budget shortfall of R7 542.90 when paying bills or loans, with the average respondent expecting they will not be able to pay their bills or loans in 7.3 weeks due to financial hardship.

Across the country, no province had fewer than 83% of respondents saying they were concerned about their ability to pay their bills or loans. In Limpopo, a staggering 100% were worried about their ability to make ends meet.

In the US, respondents concerned about making ends meet ranged from 45% – 62%, while in the UK, figures came in at 60% – 65%.

Rough ride

For Mostert, this is one more reason to call for urgent reforms: SA will need outside help in order to recover.

“We don’t predict the future, because that depends on what people decide. But if there is no course correction, we are in for a rough ride,” he says.

This “rough ride”, according to Mostert, which includes a very rapid decline and slow recovery; a sharp increase in inequality; “deep” and “unnecessary” scarring on the job market; total erosion of South Africa’s already poor savings track record; and exacerbated damage to unemployment numbers by the Fourth Industrial Revolution, the effects of which will be accelerated.

Course correction involves urgently focusing on a more business-friendly environment. Mostert cites South Africa’s sliding rankings on INSEAD’s Global Talent Competitiveness Index; it has also slid in the World Bank’s Ease of Doing Business report, dropping from position 32 in 2008 to 84th out of 190 countries in 2019.

“Jobs cannot come from government. That’s impossible,” says Mostert. “What are you left with?

“Business, in all its various forms. Unless you are going to dramatically accelerate a welcoming environment for business, including foreign direct investment, the current future will be utterly undesirable. We need something drastic to attract investment – and it has to be foreign.”

Ackerman agrees. “The trouble is that taxes are drying up, which pushes government into a debt trap. You can only borrow up to a point,” he notes. “It’s totally unsustainable.

“If we can institute some reforms we can start heading for recovery. But if not, then unfortunately we are likely heading for a bailout [from the IMF].”

To survive Covid-19, South Africa ultimately depends on spending and investment from resilient economies, says Mostert. “There is no way SA can pull itself up by its own bootstraps. We can’t do something like inspire consumer spending and hope that gives us a chance. There just isn’t money,” he says.

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