Does a Fiscal Reckoning Loom for South Africa?

South Africa started 2020 on rough footing with the economy having slipped into recession in the fourth quarter of 2019. The nation continues to be plagued by a weak economy, falling currency, and high debt levels, and the March 27 implementation of stringent COVID-19 lockdown measures only exacerbated the situation. With South Africa now easing its lockdown even as COVID-19 cases surge, things are likely to get much worse, even as the central bank actively works to mitigate the economic impact of the shutdown.

In the first quarter of 2020, Africa’s most advanced economy contracted for the fourth time in five quarters. Real GDP fell by 2.0% on an annualized quarter-over-quarter basis to start the year; this came on the heels of contractions of 0.8% and 1.4% in the third and fourth quarters of 2019, respectively. Efforts to engineer an economic turnaround were upended when, faced with the global COVID-19 pandemic, the government imposed one of the world's strictest lockdowns in late March. To contain the virus, the government closed virtually all mines, factories, and businesses across the country between April and May 2020. Furthermore, almost all movement outdoors was restricted, and the sale of cigarettes and alcohol was banned.

In recent weeks, in the face of a deteriorating economic situation, President Cyril Ramaphosa has been forced to ease lockdown restrictions even though COVID-19 cases have been rising rapidly. But the economic damage has been done.

Consumer Confidence Plunges to a 35-Year Low

The COVID-19 pandemic and subsequent severe restrictions on almost all non-essential economic activity in South Africa sent the FNB/BER Consumer Confidence Index (CCI) plummeting from an already depressed level of -9% in Q1 of 2020 to a shocking -33% in Q2. The latest CCI reading is now only three index points shy of the all-time lowest consumer confidence level of -36% recorded in 1985.

The sharp decline in sentiment coincides with precipitous declines in revenues across most industries; the construction, manufacturing, transport, and mining industries have been the worst hit. The unemployment rate surged to 30.1% in the first quarter of 2020, one of the worst among emerging-market economies. Even those South Africans who still have a job are facing salary cuts and an uncertain future.

Higher demand for precautionary savings at the household level and rising solvency risk at the corporate level are interconnected. With dismal consumer confidence and the high unemployment rate, the country runs the risk of further fiscal drains from state-owned companies as the virus constrains activity.

South Africa’s Economy Shocked into Further Debt

Finance Minister Tito Mboweni announced an emergency supplementary budget in June to address the COVID-19 pandemic. In this budget, the government deficit would widen to 14.6% of GDP in the current fiscal year, while debt would jump to 81.8% of GDP. These increases are mainly due to the revised revenue projections and payouts from the Unemployment Insurance Fund (UIF). South Africa’s plans to rein in government spending will be hard to implement due to low economic growth and a well-known poor track record of delivering on debt and spending cuts historically.

Mboweni’s adjustment budget was less of an adjustment but more of a new budget in its entirety. The revised budget was necessitated by three things: a collapse in economic activity, a large decline in tax revenue collection, and the need to increase the money allocated to departments and programs linked to the government’s COVID-19 response.

The government estimates it will miss its tax collection target by more than R300bn. In addition, Mboweni expects the government to run a 15.7% deficit, which translates into R761.7bn for the current fiscal year, which concludes at the end of March 2021.

South Africa recorded a government debt equivalent to 62.2% of the country's GDP in FY 2019. Government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields. 

The Economy Is Entering a Deeper Recession Than Most Emerging Market Peers

South Africa has the highest number of confirmed coronavirus cases in Africa, with over 450,000 infections recorded, and over 7,000 deaths. The number of daily new cases has fallen in recent days, but the country is still recording over 7,000 new cases per day.

The consensus forecast for analysts surveyed by FactSet projects that real GDP will decline by 7.2% in 2020. The shock to South Africa’s economy suggests that the COVID-19 crisis will have a long tail-end effect.

Sara B. Potter, CFA, also contributed to this article.