South African government launches R500bn stimulus package
Equivalent to a tenth of the economy
President Cyril Ramaphosa in his fifth address to the nation in five weeks announced a R500 billion ($26.1) stimulus package that is equivalent to a tenth of the economy. Although Ramaphosa had been praised for his swift action to contain the spread of the virus with his first address on March 15, a mere 10 days after the first coronavirus case had been reported, the government had been criticized for its slow response on the economic side as the national lockdown has seen a drastic reduction in economic activity.
Although the lockdown succeeded in cutting the daily increase from 243 on March 27 to only 17 the following day and then kept the daily increase below 100 until April 17, there has recently been a trend upwards and most epidemiologists expect some form of lockdown to continue until after the normal winter flu season, or in other words until September.
A survey of 707 firms by Statistics South Africa showed “over 40% of businesses indicated that they are not confident that their business has the financial resources to continue operating throughout the COVID-19 pandemic.”
The survey, which was conducted between March 30 and April 13showed that over 80% of businesses experienced below average turnover, around 37% expected the size of their workforce to decline, with decreased working hours at 28%, temporary layoffs at 20% and with almost half (47%) saying that they had temporary closures or paused trading activity.
The national lockdown has had a severe negative impact on business turnover across all industries, with the construction industry, transportation and storage, real estate and other business services, retail and wholesale trade, manufacturing most affected.
Many companies are barely holding on, and the longer the economic shutdown persists, the more vulnerable household and corporate balance sheets will become, with an escalation in the negative impact on the economy as savings are run down, retrenchments take place and businesses go bust. On almost a third (32%) of South African tenants had failed to pay their rent in full for the month of April as there had been a sudden stop in income, according to the Tenant Profile Network.
The breakdown of how this money will be distributed is as follows:
R20 billion – to fund the health response to fight coronavirus;
R20 billion – an additional amount to be made available to municipalities for the provision of emergency water supply, increased sanitisation of public transport and facilities, and providing food and shelter for the homeless;
R50 billion – to be used to relieve the plight of those who are most desperately affected by the coronavirus through social grants;
R100 billion – to be set aside for protection of jobs and to create jobs;
R40 billion – set aside for income support payments for workers whose employers are not able to pay their wages;
R2 billion – to be made available to assist small and medium enterprises and spaza shop owners and other small businesses;
R200 billion – a loan guarantee scheme to be introduced in partnership with the major banks, National Treasury and the South African Reserve Bank to assist enterprises with operational costs, such as salaries, rent and the payment of suppliers;
R70 billion – amount of tax-related cash flow relief or direct payments to businesses and individuals;
R100 million – value of assistance in the form of loans, grants and debt restructuring provided to small, medium and micro enterprises, spaza shop owners and other informal businesses;
R162 million – finance approved by the Industrial Development Corporation to support companies to procure or manufacture personal protective equipment;
A potential R80 billion – the amount unlocked after the South African Reserve Bank cut the repo rate by 200 basis point.
Ramaphosa said that funding for this package will be raised locally through institutions such as the Unemployment Insurance Fund (UIF), and through international groups such as the BRICS New Development Bank, the World Bank and the International Monetary Fund.
He added that cabinet has agreed to the phased reopening of the country’s economy.
“As I have said previously, if we end the coronavirus lockdown to abruptly we face the uncontrollable spread of the disease. We will therefore follow a phased approach in reopening the economy,” he said.
The government has scaled up testing and has conducted more than 110,000 tests so that they can take an evidence-based approach to the easing of the lockdown with some areas having easier restrictions than others.
Professor Chris Adendorff from the Nelson Mandela University Business School said the package, although welcome, was not enough.
“Simply put, it’s not enough. We still need to actually get the monies that we don’t have in our coffers,” he told The BRICS Post.
Peter Attard Montalto, the Head of Capital Markets Research at Intellidex said there were two key omissions in the address.
“First, there was no mention of South African Airways. Secondly, although it has become clear that the lockdown has radically damaged the ecology of the informal sector, there was no attention paid to restoring it as far as possible in the next few months. Perhaps more will become clear by the end of the week,” he said.
Dawie Roodt, the chief economist at the Efficient Group was worried that some temporary support measures would become permanent.
“Although the measures toward supporting the needy will go a long way, the dangers are obvious. Firstly, there are few things as permanent as a temporary increase in ‘support’. There is no way these increases will be temporary. Secondly, the support for those not covered by other projects may well be the beginning of a basic income grant. I am afraid we are probably entering a period of prolonged economic hardship, continued weakness in our currency, higher taxes, and more state intervention, marked and aggravated by an undermining of liberty and safety,” he said.
Helmo Preuss in Makhanda, South Africa for The BRICS Post