Research by economic strategists and capital markets analysts confirms that the economy is officially in the open entrance heading towards a recession. Photo: ANA Archives Research by economic strategists and capital markets analysts confirms that the economy is officially in the open entrance heading towards a recession. Photo: ANA Archives
JOHANNESBURG – President Cyril Ramaphosa, also the current chairperson of the African Union, acknowledged on April 9 that the Covid-19 pandemic could potentially wipe out South African the citizens if the country did not extend the lockdown from 21 to 35 days.
Research by economic strategists and capital markets analysts confirms that the economy is officially in the open entrance heading towards a recession, as a result of the Covid-19 pandemic, inability to bounce back from 2008 global financial crisis and the structural impact caused by pre- and post-apartheid events.
The recession that economists and analysts have been predicting was in part because we’ve been in the stop and go recession for the past four years and the economy was warned by global rating agencies such as Moody’s Investors Services and S&P Global Ratings to implement economic reforms and work on inspiring economic activity, and that didn’t happen.
Rating agencies went further in advising on political susceptibility and the broader stakeholders to reach a consensus on socioeconomic development priorities that can turn around the economy from the challenges.
Both economic booms and economic slowdowns come to an end eventually, but the South African economy was not resilient enough to withstand the impact of corruption that was rife over the past decade and the modes of the viable system that were introduced. Its gains were completely destroyed.
The government, private sector leaders, economists and capital markets strategist must deeply reflect on the different types of recessions and recoveries experienced by the United States, European markets and Asian markets, mainly Japan during the ’90s. Unfortunately, a recession doesn’t impact economies the same way.
The PESTEL outcomes of these nations are different and South Africa is at its weakest point now as we are unable to have a solid R300 billion Covid-19 impact fund. We have raised about R14 billion, which is way too low, the desired expectations to respond to the current global economic crisis.
In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. Meanwhile, an L-shaped recession depicts a steeper decline and a very prolonged recession, that can be also categorised as depression or a lost decade.
A U-shaped recession is likely to happen at economies that are experiencing a dynamic economic strength than what we are facing in South Africa and U-shaped takes longer than a V-shaped recession, but also it has a less-clearly defined trough.
We can characterise the Jacob Zuma economy as U-Shaped as it continued to have the stop-and-go behaviour as opposed to a smooth freeway economic growth. We had a sustainable tentative recession.
Through our systems thinking process we have come to a conclusion to demystify the two types to base our advisory we need to share with the nation, corporates and small businesses, which is an understanding that the recession we’re headed into is understanding the difference between the “V” and “L” shapes.
We have observed some things about the deeper recessions, those recessions are the ones that seem to come along with credit events: corporate defaults, corporate bankruptcies, as well as layoffs.
In a U-shaped recession, which is longer than a V-shaped recession and has a less-clearly defined trough, gross domestic product (GDP) may shrink for several quarters, and only slowly return to growth.
Does the global economy have a defined trough? Do we know the GDP growth after a short term that our economies with bounce with? We cannot answers such ambiguous questions now as we are affected by a health crisis that forces reflective leaders to protect people at the expense of the economy.
Given the sudden, severe and exogenous nature of the current downturn, the onset of which will likely be dated to the second week of March, some global economists were initially expecting a V-shaped recovery. The impact of the Coronavirus pandemic to the economy will not be a uniformity from country to continent or trade blocs.
The country’s GDP is set to shrink for several quarters, and only slowly return to trend growth. Former President Jacob Zuma led the country during a U-shaped recession that is now connecting to the 2020 global crisis caused by Covid-19.
It will not be a brief recession, we are going to lose another decade of growth.
The United States, China, Russia and other financially capable economies within the eurozone introduced reasonable stimulus packages that resulted in a U-shaped and/or V-shaped recession. South Africa, meanwhile, failed to recover from the global financial crisis and the economy has not been able to bounce back to a 3 percent growth rate that was experienced before, under the presidency of Thabo Mbeki.
Market conditions and the socioeconomic imbalances are pushing South Africa to an L-shaped reminiscent of the recession that occurred in Japan following the bursting of the Japanese asset price bubble in 1990.
Demand and supply shocks are both affected, on the Supply Shock side, factories, business and borders closed and on the Supply shock side you get industries that don’t need the materials that they are expected to use for their production possibilities curves.
Production in China has dropped to an unprecedented 30 percenr and also an expected 1 percent GDP growth contraction, which will affect European markets and African economies relying on Chinese imports. The global Purchasing Managers Index portrayed more red flags in key manufacturing nations such as Germany, United Kingdom, United States as well as Japan, China and South Africa.
The 21-day lockdown and the two-week extension is a good approach for South Africa’s health conditions. The country’s Covid-19 Solidarity Fund managed to raise about R15 billion commitments with complex structural principles for the funds depending on the source. Before that, the Budget Speech 2020 allocated R211 billion to economic development that we perceived too low to boost economic activity for a struggling economy. Later Moody’s downgraded South Africa to junk status and five commercial banks were also downgraded by Fitch Ratings.
Spain experienced an economic bloodbath as a result of the coronavirus but interestingly, they are ranked first on health by the World Economic Forum Global Competitiveness index, 2019 Report.
A global crisis needs a global solution, the global economy failed to recover and the most exposed are the low-income countries that are mainly in Africa, which are still struggling from recovering from the 2008 global financial crisis.
The L-shaped recession will be caused by our current economic and institutional situation and we haven’t come with an economic reforms strategy that was needed since 2016. The country doesn’t seem to have clear direction on how it will react post-lockdown and high chances are we might not be ready to risk South Africans to this novel virus by the end of April 2020. South Africa needs another team that will be currently working on proactive operations approaches after the 35-day lockdown.
- The Public and Private must expedite the implementation of economic reforms to improve socioeconomic conditions
- The South African government and political parties must reach a consensus on a Meritocracy system in electing cabinet members and other spheres of government. That will mean a selection of the sound and qualified leaders as a first process and then only those selected candidates will be the ones to stand for elections for their political conferences. Some criteria have to include age limits at 55 years and proven credentials of productively running institutions that delivered results
- The Private Sector is facing a crisis as well mainly that the problem will require different directors and managers that can adapt in this current situation and not depress the corporates to quickly turnaround as expected
- 100 basis points cut to the repo rate
- South African government must identify funding streams that can quickly resolve the problems of the South African taxi industry and informal traders with reasonable subsidies
- A R120 to 150 billion calculated to be sufficient to compensate the unemployed people for 4 month
- Have you provided a package for employees that are in contract work and those that employers cut 40 to 50 salaries because of lockdown
- Stimulus packages for informal traders
- The broad stimulus for Small Medium Enterprises
- Repayments holidays for corporates, Small Businesses and workers for different credit facilities they hold for at least 4 months
- Foreign Exchange compensations from the currency losses
- South Africa needs to develop the continent for a sustainable recovery
- Provide enough accessible testing points and give all people that are testing immune boosters instantly, positive or negative. People have a chance of contracting the virus just after testing or getting results
- What will happen to Industrial and Mining employees that went back to work? Who will be responsible when people get infected and pass-on?
- Avoid a Stop and Go approach, Source enough funds to rescue the economy from this challenge.
Above all, all stakeholders must not delay the process because of ideological orientation, the country needs to move with speed and respond to the economic challenges we are facing. We must be pragmatic that all nations are affected and we don’t have enough alternatives for financing.
While you are negotiating with pension funds to assist in financing some impact-related projects, it will be good to take advantage of available funds and the corporate Finance and Legal professionals the country has will assess all conditions. It is not pragmatic to base a 1982 condition in 2020, there is transparency to a larger degree in the global development finance and corporate finance industry now than before.
It is going to get a lot worse before it gets better for South Africa’s economy. Analysis has found that extraordinary challenges and complexity will require extraordinary leaders and solutions. Uncertainty, complexity and ambiguity are scenarios of the new decade in emerging markets.
Miyelani Mkhabela is an Economic and Capital Markets Strategist, Director at Antswisa Transaction Advisory Services, contactable at: [email protected] [email protected]