The 10% of GDP emergency fiscal response announced by South Africa’s president last night will help to alleviate some of the strains in the economy caused by the lockdown. But with this coming one month after lockdown started, a lot of damage will already have been done. What’s more, the design of the measures highlight continued concerns in the government about the weak fiscal position – a return to austerity seems on the cards in 2021, which will hold back the recovery.
- The 10% of GDP emergency fiscal response announced by South Africa’s president last night will help to alleviate some of the strains in the economy caused by the lockdown. But with this coming one month after lockdown started, a lot of damage will already have been done. What’s more, the design of the measures highlight continued concerns in the government about the weak fiscal position – a return to austerity seems on the cards in 2021, which will hold back the recovery.
- South Africa’s government was quick to impose containment measures to curb the spread of the coronavirus. And these seem to have been successful in flattening the infections curve more quickly than in many other emerging markets. (See Chart 1.) However, the government has been extremely slow to introduce economic support for firms and households. Indeed, President Ramaphosa’s speech to the nation last night outlined the first significant policy response from the fiscal side.
- The headline figure of a ZAR500bn (close to 10% of GDP) package is striking for its size. The government will flesh out details soon. At this point, we know that ZAR200bn will consist of loan guarantees for companies, and a further ZAR140bn will consist of job and income protection measures. There will also be increases in benefits as well as tax deferrals. At this stage, three points are worth emphasising.
- First, the government’s response will take some of the pressure off the Reserve Bank to provide stimulus. Even so, the scale of the economic damage means further monetary easing is probably on the cards. We’ve pencilled in an additional 75bp of cuts in the repo rate, which would take it to 3.50%.
- Second, the fiscal response is coming late. South Africa’s nationwide lockdown was imposed on 27th March; this comes almost a month later. Low-profile indicators suggest that parts of the economy have come to a standstill, and unemployment and insolvencies will have risen. Damage has been done.
- It’s not quite clear why it has taken so long. It may be due to Mr. Ramaphosa’s well known tendency to seek consensus from a broad range of groups within the country, but it may also reflect the constraints imposed by South Africa’s weak public finances.
- This brings us to the final point which is that the design of package highlights worries about the country’s fiscal health. Of the package, ZAR200bn (40% of the total) is loan guarantees, which the government might not need to recognise if firms can repay these. Of the remaining ZAR300bn (60%), 130bn will consist of a ‘reprioritisation’ of existing spending, so it is not a net increase in spending.
- On the financing side, Mr. Ramaphosa didn’t make any mention of market debt issuance – he said this will be funded by using the Unemployment Insurance Fund and help from multilateral lenders. As we suggested in our Weekly last Friday, a short-term IMF deal is looking increasingly likely.
- The lesson from other EMs is that support packages tend to increase in size – and the same seems likely in South Africa. Coupled with a fall in revenues, we think the budget deficit could plausibly widen to 15% of GDP this year. (See Chart 2.) The government should be able to finance this on the domestic market. But a return to fiscal austerity next year is likely.
Chart 1: Coronavirus Infections (T = Day of 100th Case)
Chart 2: Government Budget Balance (% of GDP)
Sources: Refinitiv, Capital Economics
Sources: Refinitiv, Capital Economics
William Jackson, Chief Emerging Markets Economist, firstname.lastname@example.org