What effect will Covid-19 have on our economy?

Our country’s economy is already reeling from the effect of Covid-19 – and the worst could be yet to come. That is the verdict of Dr Azar Jammine, director and chief economist of Econometrix. Charleen Clarke brings us the details of a fascinating Webinar he addressed this week in order to answer this question: What effect will Covid-19 have on our economy?

In so doing, he gave participants some good news and some bad. First some good news. Jammine said that, if one considers a ranking of 200 countries, South Africa isn’t faring too badly. “We are 50th when it comes to the number of infections and 56th when it comes to the number of deaths. Looking at the rankings per one-million population, we are 132nd  when it comes to the number of infections, 122nd when it comes to the number of deaths and in 100th spot when it comes to the number of tests conducted,” he noted.

Despite this, the economic effect of the pandemic has been dire. “There are supply side impacts – an inability to gain access to products manufactured internationally and domestically, with a big impact on export-oriented activities.

“Demand-side impacts have entailed a disruption to business activity from social distancing and lockdown; a drying up of cash flows in travel, transport and leisure activities; with negative impacts for event-management companies and shopping centres.

“Oil companies have also been negatively impacted. We have seen a dramatic fall in the oil price thanks to low demand. Luckily, the impact on the South African economy has been restricted. Having said that, fuel sales in this country have dropped 80 percent in the past month,” Jammine revealed.

Investors and banks have also come under strain. “We have seen knock-on effects from the financial market sell-off – with an accompanying negative impact on the solvency of the financial sector and pensioners. Strain has also been placed on the banking sector that is now providing debt relief, forgiveness and interest payment holidays,” he added.

Sobering survey

The impact of the Covid-19 pandemic on businesses thus far has been dramatic. Jammine quoted the results of a Stats SA survey of 707 businesses with more than R2-million turnover (conducted over the period  March 30 to April 13). The results are sobering indeed:

  • 85,4 percent of businesses reported turnover below normal, with only 1,3 percent experiencing an improvement;
  • 46,4 percent reported “temporarily closed or paused trading”;
  • only 50,4 percent expected to have an unchanged workforce through April;
  • 19,6 percent of workers were being laid off, and 28.3 percent were experiencing a decrease in working hours;
  • 34,6 percent of businesses suffered a decline in exports, and 40 percent of importers suffered a decline (but only 40 percent of businesses export and 48 percent import);
  • only 28,9 percent were confident of surviving Covid-19, with 42,2 percent expressing a lack of confidence;
  • only 54 percent could survive a lockdown of up to three months;
  • 49,3 percent were able to operate remotely instead of at work;
  • 87,5 percent expect financial and operational conditions to be negatively affected; and
  • 65 percent believe that prospective conditions will be worse than during the global financial crisis.

On a positive note, Jammine highlighted that 52,6 percent of respondents were experiencing unchanged financial conditions. “Having said that, 20,5 percent needed to access a debt relief holiday and 22.8 percent exploited the tax deferment allowable on PAYE and provisional tax, with 13.3 percent accessing grant or loan schemes available to small businesses, whilst 38,2 percent were trying to access the Temporary Employee Relief Scheme (TERS),” he added.

Lockdown: good or bad?

While these figures are directly related to the lockdown, Jammine danced around the issue of whether the lockdown was a good or bad thing.

“Our human rights are being trampled on – because we’re being forced to stay at home. There are those who ask why politicians should be entrusted to decide what people should and should not do. It’s a valid question. However, they are doing this on the basis of research.

“There have been a few instances (hot food being sold, for instance) where it has been perceived to be ad hoc. But I think they can be forgiven for making mistakes from time to time – they have had to make a massive number of decisions in a very short period of time,” he commented.

“The whole point of the lockdown is to buy us more time. From the evidence that I have thus far, the moves in favour of lockdowns and social distancing are proving to be successful. Our lockdown has been more stringent and draconian than in most other countries. Spain and Italy are already talking about lifting their restrictions at a time when they are still losing 250 to 300 people a day. Fortunately, we are not in that boat ourselves,” he noted.

The good, the bad and the ugly

So, the lockdown is neither good nor bad, but what is the impact of Covid-19 on the economy? Jammine explained that Econometrix has come up with three future scenarios for the South African economy. The company calls them the V, U and L-shaped scenarios. We would prefer to call them the relatively good, the bad and the ugly.

To give you an indication of these scenarios, Econometrix is predicting a 3,2-percent decline in gross domestic product (GDP) during 2020 with the good scenario, a 6,4 decline with the bad and a 12 percent decline with the ugly. The rand is expected to trade at R16,90 to the dollar this year (good), R18,34 (bad) and R22,59 (ugly).

Econometrix has shifted its stance from a V to U shaped scenario (so, good to bad). “It is unlikely that we are going to see a vaccine for at least another year. The key will be to watch the death rate. If we were to see a spike (which we have been told is likely), you could get a lot of people starting to panic and we could be starting to downgrade our forecast to L-shaped,” he warned.

Big challenges

If that’s not enough, Jammine warned that the country was facing major challenges.

“There is a logjam of processing UIF payments. A mere 75 people have been working at the UIF, trying to examine all the TERS claims. This is woefully inadequate. The mooted 200 people won’t be enough either,” he pointed out.

Other challenges include the inaccessibility of licensing applications for informal traders, massive oversubscription for funding of small and medium enerprises (SMEs) from donations, and the corrupt exploitation of rescue packages.

He stressed, however, that many of the country’s challenges have been there for some time. “As the lockdown ends, we need to wake up to the fact that we had major challenges long before this. We have to wipe out corruption; 26 years ago, there was not this perception of massive corruption and of people raping the country and getting away scot-free. We have to see some signs of action against the perpetrators of corruption,” he urged.

Other major challenges, according to Jammine, include the excessive debts that have to be funded on state-owned enterprises and their inefficiencies too. “We also need to give attention to the education inefficiencies, which impair the ability of people to learn and earn a living, and we need to resolve the adversarial relationship between unions and employers. The size and lack of efficiency of the public services require attention too,” he stressed.

Opportunities abound, too

However, while Jammine was far from upbeat or optimistic, he did note that there are numerous opportunities for South African companies  – and these could impact positively on the economy. “Hopefully, the doomsday scenarios will have turned out to be excessive. Under even the best circumstances, it is going to be a very tough environment in which to survive. But there are opportunities…” he noted.

Jammine believes less globalisation will result in more nationalisation. “More nationalism will pave the way for industrialisation (import replacement). There are opportunities for more domestic production. This is already happening with medical equipment, but there is also an opportunity in componentry,” he maintained.

He noted that healthcare is becoming paramount in our society. “We should not believe that this (Covid-19) is a once-off. These viruses are going to start creeping in more frequently. We need to develop a far better methodology to cope with them. Oncology is also a massive entity in its own – in terms of research and development. So, too, are generics,” he said.

Education technology is another area of opportunity. “There will be an explosion in technology when it comes to distance learning. Technologies such as Zoom will grow. I would like to believe that personal contact and presentations will come back into their own, but there will be a lot more done remotely – even if personal contact does return,” Jammine maintained.

Robotics and automation are areas of opportunity, as is security. “We already have a huge problem with cybersecurity. We will see the development of more systems in this area going forward,” he added.

Environmentally friendly innovations and waste management are two other future growth areas. “Our world of materialism and consumption has damaged our planet. People are becoming more aware of the environment and clean air. Waste management will be an area of massive improvement in the future,” he said.

The final two areas of opportunity are products for an ageing population and mental/social services. “There are huge opportunities in terms of continuing to prepare for retirement planning, retirement villages and the products that old people need. This lockdown has also highlighted the immense importance of helping the mentally disabled,” he noted.

He ended his presentation on a high note. “If you can find companies that are involved in these areas, and you have astute asset and investment managers to pick and choose these opportunities, you can make big gains,” he urged.

So, there you have it. The coronavirus has arrived with a vengeance. But all is not lost.

Published by

Charleen Clarke

CHARLEEN CLARKE is editorial director of FOCUS. While she is based in Johannesburg, she spends a considerable amount of time overseas, attending international transport events – largely in her capacity as associate member of the International Truck of the Year Jury.
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