South Africa’s Covid-19 and junk status conundrum

When it rains it pours, in describing South Africa’s current socio-economic predicament, never has a phrase been more apt. In fact, it’s not only pouring, but Africa’s most industrialised economy runs the risk of being swept away by a tsunami that will take years to recover from. The Covid-19 crisis coupled with a credit ratings downgrade by Moody’s to junk status means South Africa is teetering on the brink, the road ahead will be long and treacherous.

The Covid-19 crisis could not have come at a worse time as South Africa’s economy is currently in recession, following contraction in the third and fourth quarters of last year. 2020 was seen as a potential bounce back year, but the virus has dashed any hopes of economic recovery and the South African Reserve Bank predicts a GDP contraction of 0.2 % this year. However, for economists this is an optimistic figure, with many predicting a contraction of up to 6 % or more, with the best-case scenario being a 2% to 3% contraction. What is certain though are the massive economic challenges ahead; at 29% the unemployment rate is already sky high and with the current economic malaise it could go even higher, raising the prospect of civil unrest.

To add to the doom and gloom is ratings agency Moody’s decision to downgrade South Africa’s credit rating to junk status on Friday, citing weak GDP growth and deterioration of fiscal strength as some of the reasons.

Moody’s is the last of three big ratings agencies to downgrade South Africa to sub-investment grade and this means the country will be kicked out of the World Government Bonds Index, resulting in billions of dollars in capital outflow. Responding to Moody’s decision, Finance minister Tito Mboweni provided an honest assessment, “to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement.”

If the usually tough talking Finance Minister can tremble in his boots what does that mean for ordinary folk? They are the ones who will bear the brunt of the ratings downgrade; the fall-out will exacerbate an already perilous economic situation by driving up interest rates, along with the cost of essentials such as food, electricity and fuel.

Economists agree the downgrade wasn’t entirely unexpected, South Africa’s problems predate Covid-19, they are a result of a decade of plunder of state resources under the previous Jacob Zuma administration. For many market watchers this current situation is simply the chickens coming home to roost. Unfortunately we now find ourselves in the perfect economic storm, much of economy has being shut down for the next three weeks while the country battles the rising tide of Covid-19 cases.

Essential services such a food production, banking and the stock exchange will remain open but everything else has been ordered shut. Crucial sectors of the economy such as mining, manufacturing, services, and tourism will be badly affected. Mining accounts for the largest share of South Africa’s exports and is critical in generating much needed foreign currency.

Small businesses face an even more uncertain future, without the safety net that big businesses have, many will not survive the lockdown. Government has allocated $30 million to support struggling companies, but business owners have complained of significant red tape in accessing those funds. For their part South Africans have reacted to the lockdown with typical stoicism, we have battled many a crisis as a country and the general mood is that we will overcome the challenge of Covid-19. The government, which has shown unprecedented levels of efficiency and communication during this crisis needs to apply the same energy and resources in fixing the economy and the country’s many social issues once this crisis is over. They say the only good thing about being rock bottom is that the only way is up, South Africa needs to galvanise its people and start clawing itself out this economic black hole.

Share this

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

Be the first to know

Get our stories first