The devastation being wrought by Covid-19 on the global and local economy

Our conversation with Nicky Weimar, Group Chief Economist from Nedbank focuses on what to expect from the global and SA economy given the Covid-19 pandemic. We also ask Nicky what measures she would implement as the Minister of Finance.

The global banks, IMF and World Bank all predict double digit declines in Q2 with some recovery in Q3 and Q4. Opinions differ widely regarding a global forecast, with the worst forecast being -6% and the most positive being 0.7%. The consensus view is that the world economy is set to shrink by 1.2%. The supply shock to the world economy will be dramatic as we saw from China’s February lockdown, with declines in output of 24%-25% in one month. The demand shock impact is equally worrying and a dramatic increase in retrenchment and unemployment is expected, leading to shrinking household incomes, lower consumer spending and lower demand. Oil is trading at record lows with limited upside predicted, while the US Fed is keeping interest rates as low as possible and will continue with quantitative easing to feed liquidity into the system.

Locally, we expect a GDP contraction of -4.5% this year, taking us into deep recession. However, with an extended lockdown, we expect even further GDP contraction taking us to levels of -6% to -6.5% for the year. When recovery comes, we will probably return to very modest growth – below 1% and possibly from 2022 onwards, just over 1%. The sooner we can open certain industries, the less severe the drag on the economy will be. In terms of the strength of the Rand, we believe it was overvalued prior to Covid-19 and expect to end the year at about R17.10 to the USD. We expect inflation to hit a low of about 3.5% in June/July with a slow drift back to 4%. The important thing is to remain below the Reserve Bank’s midpoint of 4.5%. We anticipate 100bps cut in May and possibly another 25bps in July. We expect the budget deficit to be as low as 8% - 10% of GDP, while our debt burden could climb up to 90% of GDP. As an emerging market, with a narrow tax base, operating with this debt burden will definitely hold back growth in the years ahead and we expect to see sharp contractions in fixed investment by the private sector. While UIF and social grants offer relief for some, these and the other measures introduced by government will come with a high potential for fraud. The response to Covid-19 will necessitate increased government spending, but the economic contraction will to a large extent destroy tax revenue.
 
If you were the Minister of Finance, what measures would you implement to change our rating status?

I would take the IMF support immediately – it would reassure bond investors and help attract foreign capital back to SA. We offer attractive yields compared to the rest of the world but would need to mitigate the risk and the IMF would be the backstop we need. Regarding structural changes, wage cuts for ministers are a good start, but need to be followed by the rest of the public sector. Wages are the biggest item in the budget, growing well over inflation for more than a decade. I would also identify and address all legislation, regulations and systems that are not business friendly or that add to the cost of operations and discourage fixed investment by the private sector. Finally, I would mobilise our forensic accountants to root out corruption for good and restore the public’s faith in government.

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