South Africa Outlook: Tough Times Never Last

October 8, 2020

South Africa has faced one of its toughest economic slumps, where the full impact of the COVID-19 lockdown finally unveiled itself. South Africa experienced one of the world's highest COVID-19 infection rates, despite some of the harshest measures to contain the pandemic. The GDP experienced a significant drop of 16.4% in the second quarter of 2020. The official figures, published by Stats SA, paint a far bleaker picture giving a rate of -51%. This is an unfortunate result of Stats SA annualising the quarterly GDP figures for publication. Whichever way you look at it, the economy experienced the sharpest decline since the great depression in the 1930s. Notably, this was also South Africa's fourth consecutive decline in quarterly GDP.

Although many countries around the world are suffering the dual impact of a global pandemic and the economic shutdown, the reality of this decline in South Africa means large setbacks in addressing poverty, inequality and unemployment.

However, the recent opening up of the economy in quarter 3 is likely to stimulate a short term rebound. Business confidence has since improved, and it is expected that South Africa will move on track with a slow but steady recovery - should a second wave of infections be avoided. Nonetheless, the incentive for many South Africans to invest offshore continues to grow as confidence levels in the executive and ruling party remains low.

Lockdown Breakdown

In March this year, President Cyril Ramaphosa announced some of the most stringent lockdown regulations in the world, including border closures, non-essential goods and service bans, school closures, and bans on the sale of alcohol and tobacco products. (Can you believe, not even a glass of wine to make it more bearable!)  These measures were motivated by the attempt to protect the health service and to prevent the virus from spreading in overpopulated and poverty-stricken areas, which they did.

However, given the devastating effect on businesses and households, these measures could not be sustained. Therefore, government adopted a sliding scale of five lockdown 'stages'- stage 5 being the most restrictive. In an urgent need for an economic boost, the country moved from stage 5 to stage 3 within a few months. The IMF also approved $4.3 billion in financial support in late July, boding well to kickstart momentum going forward. This did not go without a cost as the number of cases/deaths increased at an alarming rate, ranking South Africa number five in the world for the number of COVID-19 infections.

A GDP Conundrum

When Stats SA first released the 2nd quarter GDP figure of -51%, it naturally caused alarm. This methodology of annualizing the rate is accurate, however we normally do not experience such dramatically fluctuations between quarters. In instances like COVID-19, annualising the estimate is highly misleading as it assumes that the economic effects of the lockdown will continue for four consecutive quarters – an unlikely scenario. Fingers crossed.

The actual drop in GDP from the first quarter is -16.4%. This decline was largely spurred by both the manufacturing and mining industry declining by over 70%, as well as merchandise exports declining by nearly 30% as a result of muted global demand and disrupted supply chains. Spending behaviour also took a large knock, with household final consumption expenditure dropping 49.8% - contributing -30.8 percentage points to total annualised growth.

Although scary, if we look at South Africa's GDP decline versus the rest of the world, it may bring some peace of mind.

Data Source:

This data showcases how severely the pandemic has impacted countries worldwide, regardless of their stage of development. The global effect has been uneven due to the timing and severity of each country's lockdown. Most of the impact appears in the second quarter as the majority of quarter one is pre-lockdown. Conversely, China was the first country hit with the virus, initiating a lockdown long before the rest of the world. This is evident in their first quarter figure showcasing the largest decline. The USA is the only country that hadn't initiated a full lockdown, hence the smallest drop in GDP in the second quarter.

Forecasted GDP growth for 2020 is approximately -7.5% for SA, the biggest contraction in 90 years. The global economy initially forecasted to expand by 3.3% in 2020, is now facing a forecast of up to -6%. Given this, South Africa stands in an unfavourable position, with recovery dampened by poor economic policy.

Another big concern in South Africa is the fiscal deficit and therefore the government's ability to stabilise the debt to GDP ratio - which lies above 70%. It is predicted that the South African economy will take longer than others around the world to recover from the pandemic due to spiralling government debt and failing State-Owned Enterprises. Over this period South Africa has lost approximately R512 billion.

Behind the Numbers

Before the pandemic, the previous president Jacob Zuma was criticised for doing too little to satisfy an urgent need for economic growth. After a decade of stagnation, defined by extensive corruption and state capture, the knock in GDP has put South Africa in an even deeper crisis.

As it stands, 55% of South Africans live below the national poverty line. Sadly, this number is likely to grow given the negative impact of the virus coupled with the government's inability to create jobs. A study conducted by the UNDP (United Nations development programme) estimated that 34% of households are likely to exit the middle class into vulnerability. Alongside this, 54% of the households that have been forced out of permanent jobs, because of struggled businesses, are at risk of falling into poverty. The SA Treasury announced that up to 7m jobs could be lost where unemployment will potentially increase from an already alarming 29.1% to 50%.  Unfortunately, women, the elderly, and the less educated have been hit hardest. The most distressing outcome of this all is that thousands were left starving. This negative output gap will remain in the foreseeable future until government takes responsibility for the devastation caused, with effective structural reforms.

Making Money Moves

There is a massive crisis in retirement funding developing for the middle to upper class in South Africa. For many people, retirement savings are their biggest investment. Managers of these funds are obliged in terms of the Pension Funds Act to invest at least 60% in local markets. This has been concerning for many investors and was not helped when South Africa’s foreign debt rating was moved down to junk status in April 2020. To put this into context, some retirement projections from five or ten years ago are out by about 35% in real terms. Combined with the impact of COVID and the appalling property market, means that many are now severely underfunded. Why? because the instrument they are using is failing them. Offshore investing, therefore, continues to showcase a large incentive for South Africans, as the fear of funds becoming trapped in the event of an irrecoverable economic state heightens.

This is leading to clients from South Africa looking to externalise their investments into safe neutral jurisdictions.

The Light at the End of a Long, Dark Tunnel

Nevertheless, with all the doom and gloom out the way, there is light at the end of the tunnel. New cases have reduced from a peak of 12,000 to 2,000 cases per day and the COVID-19 recovery rate has improved to 89%. On 16 September, South Africa was therefore downgraded to stage 1 lockdown restrictions. This included the reopening of international travel, more tobacco and alcohol liberalisation, and new freedoms for tourism businesses and restaurants (a glass of bubbles finally!). As the threat of a full lockdown slowly dissipates; the first signs of hope for economic reform are emerging for many people.

The depressing decline in economic activity for South Africa is likely to be past its worst.   President Ramaphosa is making way for economic recovery with current policy focusing on a production led economic growth as well as maximum private sector involvement. Also, there is a commitment to reduce government spending. Although the longer-term consequences of the pandemic will take time to address, we will likely see a strong bounce back in the GDP in the coming quarters – a V-shaped recovery. Already the rand has strengthened from a high of USDZAR 19.09 in May, to USDZAR 16.14 in September, which few had expected.

Overall, the economy's full return to its previous levels will not be easy, especially as businesses now take on the extra pressure and costs brought on by load shedding of electricity supply. However South Africa can look forward to warmer weather as it heads for summer in the coming months, hopefully keeping a second wave of the virus at bay.