LAGOS NIGERIA WEATHER | Possible second virus wave will cause further economic pain for SA, warns OECD

  • Under a “double-hit” scenario, a second wave of the virus will hit the country in October or November, necessitating renewed strict lockdowns. 
  • This can push the economy to contract by up to 8.2% this year, and limit recovery in 2021, says the OECD. 
  • The organisation says if a second wave of the virus can be avoided, growth in 2021 may tick up to 2.5%.  

South Africa’s economy risks contracting by 8.2% this year if the country is hit by a second wave of the Covid-19 pandemic in October and November, according to a new report by the Organisation for Economic Co-operation and Development.

Under this “double-hit scenario”, economic recovery in 2021 will remain limited, with GDP only growing by 0.6%. If a second wave of the virus can be avoided, growth in 2021 may tick up to 2.5%. 

The OECD on Friday released its annual economic survey on South Africa, with a focus on the impact of the Covid-19 pandemic, which has resulted in a collapse of global growth.

It projects a contraction of -7.5%, in the case of a single outbreak, which will worsen to -8.2% if a second wave occurs. The contraction will inevitably translate into higher unemployment.

The group’s predictions for SA’s economic contraction are more severe than the 7.3% slump in GDP anticipated by the SA Reserve Bank.

SA’s government has responded to the economic shock caused by the pandemic and nationwide lockdown by setting up a R500-billion fiscal stimulus package, which includes social protection, support to workers and municipalities.

The Reserve Bank, meanwhile, has responded through monetary policy measures including lowering interest rates by 300 basis points, providing regulatory relief to improve credit flow, putting together a R200-billion loan guarantee scheme in conjunction with major banks, and injecting liquidity into the financial system via bond buying on the secondary market.

The OECD believes there is scope for further rate cuts to support the economic recovery, said its Economics Department Country Studies Director Alvaro Pereira.

Lower interest rates would provide financial support for households and businesses, he said.

“If inflation continues to go down, there will be margin to further reduce interest rates. That is what happens in many countries.”

Pereira, however, also noted that the Reserve Bank’s responses to the pandemic so far have been adequate.

Importantly, government should ensure fiscal sustainability and stabilise debt. Treasury expects the debt to GDP to widen to 87.4% of GDP this year, and Finance Minister Tito Mboweni has previously warned that we are on the brink of a sovereign debt crisis if we do not make changes.

Areas that require change include the public sector wage bill, which is at 12% of GDP. “Wages are relatively high, [government] must be prudent in the next few years,” said Pereira. This does not mean government should implement wage cuts, but rather wage increases should be slightly lower than inflation for the next three years.

Secondly, the restructuring of SOEs over the next few months is key for fiscal sustainability, said Pereira. While plans are put in place for SOEs like public utility Eskom and national carrier SAA, Pereira said what is required is implementation. Addressing governance at SOEs will also be a key part of their restructuring, he said. 

The underperformance of SOEs has been a result of mismanagement, corruption, overstaffing and an uncontrolled wage bill, the report found.

Reforms would include staff reduction and the introduction of private sector players. The OECD also recommended the separation of responsibilities of the board and management, and said boards should be strategically supervised, monitored, and the management of SOEs audited. It also recommended that prosecution of corrupt offences should be carried out.

When asked whether there was political appetite to reform SOEs, Pereira noted that in every country it was difficult.

“We know for a variety of reasons there is a reluctance to reform. I do not think this is a case for SA.

“I think there has been an explicit move by Treasury and Minister Pravin Gordhan that reform is key,” he said. Pereira added that if nothing is done to turn around SOEs, it will threaten fiscal sustainability in the country.

Treasury Director-General Dondo Mogajane added that fiscal sustainability is “paramount”.

“We must ensure state-owned companies are properly managed and able to, on their own, raise their own capital and perform the developmental mandate bestowed upon them,” he said.

On one hand, government is balancing the support they have to give to those critical to the economy, and then closing down those which are not “critical” to the economy. “That will be a challenge continuously faced, to decide which ones are relevant for the environment we are in,” said Mogajane. Trying to support SOEs which cannot survive will be difficult in the face of other needs such as health and social security, which need to be met.

When asked what might be the challenge to implementation, Pereira noted that the key is how reforms are prioritised, and that fiscal sustainability must be important to maintain.

For now, SA should focus on SOE reform. Now is a good time to reduce barriers to entrepreneurship, opening up sectors to competition and reduce bureaucracy, he said. On the other hand, it might be better to implement labour reforms later, he explained. In the next few months, government should look to create jobs and investments.

Falilou Fall, senior economist of the OECD, noted that in the past, reforms have been difficult to implement because not all stakeholders were aligned to the same objective. “SA has been struggling to implement reforms for the last three years due to the misalignment between different types of stakeholders,” he said. It might seem difficult in the short term but there will be “payback” in the long run in term terms of growth.

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