Apart from providing fiscal and monetary stimulus, a variety of targeted relief measures are under discussion in many countries across the world following the outbreak of the coronavirus (Covid-19) towards the end of last year.
South Africa is one of the latest countries to experience the spread of Covid-19.
In a release on Monday, consultancy firm PwC said policymakers around the globe have, in recent weeks, been debating, coordinating and implementing diverse policy responses to counter the negative effects of the virus on their respective economies.
Overall, the firm said that supply chain disruptions and reduced business activity were posing tremendous risks to economies large and small, and that fears of its effects on the global economy have brought down stock prices and increased volatility in the financial markets to the highest on record – and many of the real-economy effects were yet to be felt.
However, PwC lamented on Monday that “the deck is already stacked against South Africa”, with the sovereign already on the brink of another downgrade into non-investment grade territory; fresh gross domestic product (GDP) data indicating an economic recession in the second half of 2019; and business confidence being at a 21-year low.
LIGHTENING THE FINANCIAL BURDEN
Many countries have, since the outbreak, responded to Covid-19 with a mixture of monetary policy and fiscal policy measures as part of a multifaceted response, PwC said, noting that, among other measures, major central banks have cut interest rates in efforts to boost the global economy in an attempt to prevent longer-term national, regional and global economic downturns.
Where interest rates are already low, PwC indicated that the ability to use rate cuts are more limited, and further measures of quantitative easing and adding liquidity into the market are under discussion.
The European Central Bank’s (ECB’s) main interest rate, for example, is already at 0%. As such, the ECB announced measures to support bank lending and expand its asset purchase programme by €120-billion.
Among the emerging national economies of Brazil, Russia, India, China and South Africa (Brics), the Reserve Bank of India (RBI) announced it would conduct US dollar – rupee sell/buy swaps in the foreign exchange market to ensure adequate dollar liquidity.
It further announced in a statement on March 13 that it was “closely and continuously monitoring the rapidly evolving global situation and will take all necessary measures to ensure that money, debt and forex markets remain adequately liquid and stable, and continue to function normally,".
Elsewhere in the Brics grouping, the People’s Bank of China (PBoC) cut several of its key rates and has urged banks to allow discounted loans and payment relief for exposed companies.
In addition to rate cuts, several countries are also supporting banks through credit easing measures, as the pandemic is expected to bring about cash flow constraints. These are expected to arise both from increased demand for short-term credit from households and increased demand for working capital from companies.
The South African Reserve Bank (SARB), meanwhile, has more leeway to cut interest rates than its counterparts in the US, the UK or the European Union, PwC said on Monday, adding that the local repo rate of 6.5% was the fiftieth highest in the world out of 166 countries.
However, the firm indicated that the SARB was already on a path of monetary policy easing having recently (in July 2019 and January 2020) made two 25 basis points cuts in the repo rate. At its policy meeting in mid-January, i.e. prior to the fallout emerging from Covid-19, the South African central bank also indicated scope for further rate cuts in 2020 on the back of a favourable inflation outlook.
“The SARB has for many years said the solutions to South Africa’s economic growth challenges lie with structural and policy reforms, and not lower interest rates,” PwC said, noting that the SARB defended this stance by indicating that a 25 basis points cut in the repo rate would provide only 0.1 percentage points of additional GDP growth over a 12- to 18-month period.
“At this stage, a boost like that would be more than welcome. There is no real risk to the inflation outlook from cutting interest rates – there is no demand-pull on consumers prices at the moment. A suggested 50 basis point cut would boost GDP growth by 0.2 percentage points towards the third quarter of 2021, PwC said.
Meanwhile, on the fiscal front, stimulus packages are being agreed in some countries, which have the dual aim of boosting the economy and making funding available to cover rising costs of tackling the pandemic.
As an example, PwC referred to Italian Prime Minister Giuseppe Conte having earmarked $28-billion to this end, with half the amount to be released immediately and the other half to be kept in reserve.
South Korea launched a fiscal stimulus package of $9.8-billion, which includes supplementary expenditure for the health system and traders at outdoor markets.
Unfortunately, however, a major fiscal stimulus package is not an option for the South African government, PwC lamented on Monday.
The firm referenced Finance Minister Tito Mboweni’s 2020 Budget speech last month, wherein he had indicated that strain on the fiscus will result in the country seeing its largest budget deficit (as percentage of GDP) in three decades during the coming 2020/2021 financial year.
This comes after years of fiscal stimulus for an ailing economy that has stretched tax revenues and increased public debt significantly.
However, this does not mean that some fiscal response is not important. In order to stop Covid-19 from spreading to more South Africans and to prevent even larger long-term costs of a large-scale outbreak, additional funding needs to be made available, PwC urged.
“This includes additional resources for adequate health and testing facilities, and other prevention, containment and mitigation measures. Redirecting funding through existing budget line items would be preferable to increased borrowing.”
President Cyril Ramaphosa said in an address to the country on March 15 that the Cabinet was “in the process of finalising a comprehensive package of interventions” to mitigate the expected impact of Covid-19 on the South African economy. He indicated that the package, which would consist of various fiscal and other measures, was yet to be finalised, pending consultations with business and labour stakeholders.
On March 16, Mboweni said the National Treasury would use money from the National Disaster Fund to help finance the government’s response to Covid-19, although he did not state how much money would be available.
The Minister added that if the situation required it, more money would need to come from existing central government budget spending. In other words, money set out in the Budget Review 2020 will be reallocated to the response programme.
“It is unlikely that the fiscal measures planned will be comparable to those of the countries listed above,” PwC noted.
In conclusion, PwC said that, combined with monetary easing, the fast-tracking of economic reforms could lift local GDP growth by around 0.3 percentage points over the coming year.
“This will be a welcome boost: forecasts for growth in 2020 are dwindling as the Covid-19 impact deepens.”
The SARB will publish its latest economic growth projections on March 19 and the numbers are unlikely to be encouraging, PwC lamented, noting that a combination of monetary and economic reform actions could improve the short-term outlook somewhat.