August 17, 2020

The COVID-19 Story from South Africa

For this week’s column we are looking at the prevalence of COVID-19 in another African country and the policy response of its government. The country is South Africa, which, according to the database maintained by Johns Hopkins University in the US, has seen about 10,600 deaths to date. The comparable figure for Nigeria is 950. The number of new cases in South Africa peaked in late July and has since eased sharply.

As to why the incidence is comfortably the highest on the continent, about twice that of Egypt in the same database, we add a layman’s view to the (differing) opinions of the experts. A large tourism industry that attracts visitors from across the world is surely a leading factor. Additionally, we can point to the large population of migrant workers from the sub-region in industries such as mining. The country is also in mid-winter.

The economy was in poor shape pre-COVID, growing at less than one per cent in both 2018 and 2019. The public finances have been stretched by mismanagement and huge losses at state-owned enterprises such as Eskom (electricity) and South African Airways. The country lost its last investment-grade sovereign credit rating in March from Moody’s. After demurring at the outset, the government last month secured US$4.3bn from the IMF within its rapid financing instrument to tackle the impact of the virus. This is the first borrowing from the Fund under majority rule. The government (like the FGN) can, of course, legitimately say that the funds come without any formal conditionality attached.

Alongside a relatively short full national lockdown, the authorities have responded with both monetary and fiscal stimuli. The Reserve Bank has cut the benchmark (repo) rate by 300 basis points to 3.50 per cent since mid-January and may have a little more easing to come. As an orthodox central bank offering textbook policies, in contrast to the CBN, it has been criticized by radical elements within the ruling African National Congress and the trades union movement. It did buy government bonds at the height of the turbulence but not enough for critics calling for direct funding. Others have pushed for policies to add to inflation and erode the value of public debt, which is heading for 100 per cent of shrinking GDP.

On the fiscal side, the government of President Cyril Ramaphosa launched a US$30bn package of support to fight the virus in mid-April. The funds are concentrated on the healthcare system, on stretched municipalities and on an extension of social grant payments.

Looking on from Nigeria, we will note that the incidence of the virus has been far higher in South Africa and that the official response has also been higher, both in nominal US dollar terms and as a percentage of GDP. The damage to the economy has been greater. The IMF forecasts GDP contraction of -8.0 per cent this year, and other commentators still worse. The emergency 2020/21 budget, adjusted in June, has a budget deficit equivalent to 15 per cent of GDP.

Expectations for Nigeria are less brutal but not, we must point out, as a result of superior policy or planning. Nigeria is less integrated within the world economy than South Africa, has a miniscule tourism industry by comparison and enjoys some insulation from imported headwinds due to its large subsistence economy. On the flipside, just as Nigeria will see a smaller contraction this year, it is likely to have a more subdued rebound.

Gregory Kronsten

Head Macroeconomic and Fixed Income Research, FBNQuest