Macro Economic Commentary – May 2020

Author: Ntsekhe Moiloa


As a pupil, reader, you may have had the pleasure of reading Alan Paton’s evergreen book “Cry the Beloved Country.” Or perhaps not because it was impolitic at the time. His book “Ah, but Your Land is Beautiful” is a little less well-known so a short introduction may be appropriate. It is set in 1950s South Africa, offering vignettes of ordinary people navigating the separation that the government of the day had brought upon the people of a beautiful land. The first vignette opens with the anguish of a parent who plays in his mind the coming, deliberate disobedience of the law by his only child, his otherwise bright and obedient daughter, as part of the Defiance Campaign. Mr Bodasingh’s friend, Mr Perumal, likewise worries for his own nonagenarian grandmother who is also set to participate in the Defiance Campaign.

…catalyst for change…

The Defiance Campaign became a key catalyst for the change in South Africa’s separation laws, yet seven decades later, although Apartheid is outlawed, we are living in times where the government is asking us to stay apart as much as possible. And it is not always possible, especially for the poorest of our compatriots. The mind boggles and bellies grumble.

A few of the country’s largest banks shared some fascinating real-time data this past month, of the income impact of the COVID-19 lockdown. Salary and wage payments into bank accounts are substantially lower. Aggregated by sector of employment, it appears that employees in sectors such as catering and accommodation services have seen total wages paid contract of about a quarter, year-on-year. For the already struggling construction sector, wage and salary payments were down about a third, year-on-year. Agriculture was spared in relative terms, dropping around a tenth. For all these sectors, the year-on-year income drops already mentioned are approximately the same when looking at monthly data between February and April this year. Government workers and people employed in the finance and insurance sectors were minimally affected by comparison.

On the employer side, business receipts are down even more than salary payments meaning that margins are sharply lower, if not negative. Catering and accommodation receipts appear to have decreased by about 60 percent from a year ago. Retail receipts into bank accounts appeared to be down about 45 percent. Business services as well as mining were down around a third. The reports were, simply put, brutal. Money managers are worried that the drastic measures taken to save lives today will decimate opportunities for future generations. There seems to be a consensus building that South African GDP could contract by between 8 and 15 percent in calendar 2020. Government itself is expecting a contraction of around 10 percent.

As recently as January, the IMF’s global growth projections had a positive slope, with estimates that global growth would rise from 2.9 percent in 2019 to 3.3 percent in 2020 before rising further to 3.4 percent in 2021. By the IMF’s April review, the organisation’s 2021 expectation had swung from a positive to a negative; now 2020 real GDP growth is expected to be minus 3 percent. The IMF assumes that the COVID-19 impact will fade in the second half of this year and set up a nearly 6 percent growth rate in 2021. The IMF cites this as its baseline scenario; yet it may well underestimate a second wave of infections that hobbles economic progress again. Our history lesson for this is the Spanish Flu about a century ago where the second wave was substantially more lethal than the initial one.

What the coronavirus pandemic has clearly revealed is that our global economic system is not built with resilience in mind.

What the coronavirus pandemic has clearly revealed is that our global economic system is not built with resilience in mind. Capital has favoured efficiency and specialisation with the result that inventories and redundancies are frowned upon. A pandemic such as COVID-19, which has necessitated sheltering be put in place, initially made it difficult to move goods along traditional supply chains, disrupting not only the supply chains themselves but also the livelihoods connected to them.

In the early conversation between the Bodasinghs and Mr Perumal, Paton writes, “Mr Bodasingh looked the picture of misery, pride struggling with dread.” That is perhaps an apt description of South Africa’s state today, having been fêted for its early success in controlling the spread of the coronavirus but now facing an economic tunnel with many dangers and only a few matches for light. The confused effort at re-opening schools is perhaps just a foretaste of the challenges ahead as the government tries to coordinate a wider resumption of social and economic activity. Among more hopeful signs are that with lower foreign holdings of South African financial assets, dividend and coupon flows should be lower. Furthermore, with oil being cheaper, the gap between import prices and export prices that began building a year ago has been getting wider. Combined, lower factor payments and a more favourable export-import price differential bode well for a healthy current account surplus. On the factor payments, it also does not hurt that many companies are electing to not pay dividends. In a sense the tide has gone out and from the figures we have seen, the largest corporates have suffered the greatest percentage drop in income during the past few months. A number of the largest companies are public, listed businesses, and investors should keep a keen eye on the likely survivors of this shake-out.