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2020: A watershed year for South Africa's economic recovery

08 May 2020 Old Mutual Investment Group

The case for economic recovery out of the deep COVID-19 recession has been given a confidence boost by the Government’s decisive response to the crisis.

The praise being showered on President Cyril Ramaphosa’s steps taken to unlock the economy and the economic stimulus packages to address the impact of the COVID-19 pandemic should give the country confidence that we are moving in the right direction.

This is according to Johann Els, Chief Economist at Old Mutual Investment Group, who says that South Africa is in the midst of a watershed year. “Government’s rapid and decisive action to the COVID-19 crisis so far could support a welcomed V-shaped recovery in the local economy.”

“This year will always be remembered for COVID-19 and the way it brought the world to a halt. But for South Africans, I predict we will look back on the response to the pandemic as the start of a long-desired turnaround”.

Government’s decisive actions have laid the groundwork for the closer co-operation that has been required between all stakeholders to ensure an effective response. From this co-operation could spring a new social compact, which Els says will be one of the reasons 2020 will be considered a watershed year.

“There are strong signs that the crisis has brought Government, labour and business much closer together. Everyone has had to collaborate in an effort to combat the spread of the virus and its impact on ordinary South Africans,” says Els.

The R500 billion stimulus package announced this week is the latest intervention to boost confidence that President Ramaphosa will be able to affect the reforms so desperately needed.

Els says the relief measures build on the positive sentiment derived from the February 2020 budget in which Government showed a willingness to make tough decisions. Action to reduce the public sector wage bill was no small matter, even though this hasn’t yet been fully resolved.

“I expect that a lot of good will come out of greater co-operation and mutual sacrifices for the common benefit,” says Els. “In a strong social compact, I would hope to see accelerated structural policy reform from Government. This should ideally also include labour market reforms, SOE restructuring and privatisation”.

“While I am strongly against traditional prescribed assets as used in South Africa in the past, business could potentially bring a ‘voluntary’ prescribed assets programme to the table. This would allow pension funds to have a say in which assets they will invest in and at what levels. Labour would then have to come to the party by supporting public and private sector reforms that aim to stimulate the economy.”

An important factor that will determine the short-term recovery of the economy is how the South African Reserve Bank (SARB) responds to the deep recession and funding constraints in the bond market. The SARB should cut rates further, and while it has started limited quantitative easing (QE) in order to ease liquidity constraints, Els argues there is sufficient cause to do massive QE in South Africa to finance government’s fiscal deficit.

“There are far fewer risks doing massive QE than not doing it. I am more worried about deflation than inflation in the current situation because I don’t think hyperinflation is a real risk in these circumstances. In any case, the policy can be reversed quickly if there are any signs of inflation taking hold,” concludes Els.

“While the massive stimulus package and phased lifting of the lockdown and restart of the economy will certainly help, the long-term recoverydemands speedy implementation of economic reforms.”

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