Investec corporate accounts head Dr Greg Cline
Major sectors of South Africa’s economy will begin to recover from a Covid-19-induced slump as the country heads into spring and summer – a trend that was evidenced through Europe’s experience with Covid-19, says financial services company Investec corporate accounts head Dr Greg Cline.
“[As] in Europe, as the infection rates come down, people become more comfortable and as a result spending towards hospitality, leisure and retail facilities increases – and these are some of the sectors and factors that support a strong rebound; we are likely to follow a similar pattern as our infection rate decreases and we enter spring,” he says.
He warns, however, that, with easing restrictions, there is the risk of a second wave of Covid-19 infections, as witnessed in some European countries.
What this means for South Africa is that there should be a strong recovery going into spring and especially summer, which fortunately feeds into the festive season as well, he notes.
“From a trade perspective, there should be quite a strong rebound.”
The move to Alert Level 2 will also help expand trade a little further, with almost every sector now open to economic activity.
The major sectors of retail, manufacturing, mining and transport in South Africa declined severely, by as much as 70%, as the country implemented the Alert Level 5 lockdown at the end of March, which led to most businesses being forced to close or significantly reduce their capacities.
The effects of this become apparent in the second quarter with many companies having retrenched employees, reining in on all but essential expenditure and streamlining production lines in an effort to be as cost efficient as possible to weather the Covid-19 lockdown storm.
Cline adds that, for the year to date, imports have declined by 16.5%, and as a percentage of gross domestic product (GDP), will shrink a further 2% compared with 2019 levels.
As a result, he says, South Africa’s trade surplus has increased to record levels after lockdown restrictions were eased to Alert Level 2, due to export activity increasing in line with global demand and imports remain soft, limited by weak domestic consumption and investment demand.
However, he also notes that while demand for imports has weakened, South Africa is likely to see a resurgence in demand for imports and general trading.
In terms of imports, Cline points out that South Africa is an import-intensive economy, with trillions of rands of goods and materials imported each year.
However, Covid-19 restrictions have dampened import volumes and forced some local businesses to seek out local alternatives instead. But this also comes with another problem, in that a significant portion of South African-made goods rely on imported components or materials which have been in short supply since March, thereby affecting local availability.
However, on the whole, he says a downward purchasing trend is the result of reduced demand rather than of availability of South African products.
Combined with an increasing unemployment rate, this has resulted in less money available to stimulate the economy, which is expected to result in a contraction in GDP for this year.
In this regard, Cline says Investec is predicting a contraction in GDP of just over 10% as a result of Covid-19.
Beyond 2020, he says projections for the next five years are that GDP will grow by just over 2% every year. “What this means, is that we will likely be back into a pre-Covid-19 economic state by 2025.”
Meanwhile, in terms of South African businesses adapting to a new operating and trading environment, Cline says many businesses have streamlined their production lines and processes, focusing on their core functions, working to contain costs, renegotiating leases, rationalising work forces and focusing on being higher-margin businesses.
In this regard, he says the second half of the year will be a defining time for many businesses on the verge of survival.
“What Covid-19 funding did at the beginning of the pandemic is enable businesses to meet their obligations in terms of paying salaries, utilities and rentals, but now the challenge, going forward, is to generate sales and fund their stock.”
Therefore, Cline says businesses that are able to access lines of credit or funding to fund their stock adequately, which might involve negotiating with their suppliers for extended payment terms, are those that will be able to survive the downturn.
However, there is a significant working capital gap in which there is an extended lead time between buying materials or components, manufacturing products and distributing them.
“Covid-19 has disrupted this cycle and resulted in many of these type of businesses requiring additional funding to survive.”