South Africa is in a grip of panic over the impact of the coronavirus disease 2019 (Covid-19). The situation prompted an extraordinary address to the nation by President Cyril Ramaphosa on the evening of March 15. Apart from very real human health concerns, he commented that the outlook for the local economy – already on a weak footing heading into 2020 – is a big headache.

Economic growth forecasts have been cut over the past few weeks as forecasters realise that the impact of the pandemic will be larger than previously thought. This begs the question: how will local authorities respond?

Policymakers around the world have in recent weeks been debating, coordinating, and implementing diverse policy responses to counter the negative effects of Covid-19 on their respective economies. Supply chain disruptions and reduced business activity are posing tremendous risks to economies large and small. Fears of its effects on the global economy have brought down stock prices and increased volatility in the financial markets to the highest on record – and many of the real-economy effects are yet to be felt.

Apart from providing fiscal and monetary stimulus (discussed below), a wide variety of targeted relief measures are under discussion in many countries of the world. In the US, for example, a temporary expansion of paid sick leave and a temporary payroll tax cut were being debated. Provisions under discussion in Italy include helping workers who are facing temporary lay-offs, a guarantee fund for loans to SMMEs, and compensation to firms whose turnover has plunged by over 25%, as well as a moratorium for bond repayments. Relief measures in China include reductions in employers’ required social insurance payments, lower electricity fees, and VAT waivers.

Table 1. Examples of economic policy responses

Targeted relief measures
  • Compensation for hardest hit firms
  • Temporary extension of paid sick leave
  • Support to workers who are facing temporary lay offs
  • Guarantee fund for loans to SMMEs
  • Suspension of home loan repayments
  • VAT waivers
  • Extending tax filing deadlines for small businesses
Monetary policy
  • Interest rate cuts
  • Quantitative easing
  • Credit easing measures
Fiscal stimulus
  • Redirection of central government budget
  • Release of emergency funds
  • Increased borrowing
  • Temporary tax cut (payroll tax)

This article by PwC’s Lullu Krugel and Dr Christie Viljoen, reviews the economic policy responses that governments have taken to date. It then outlines potential options open to policymakers in South Africa. The priority for South African policymakers should be two-fold. One issue is to ensure that the outbreak is contained as much as possible. A second challenge is to ensure that neither the shock it is giving to the economy – nor the economic policy responses aimed at alleviating it – push the already fragile economy off the cliff and into a long-term recession.

However, the deck is already stacked against South Africa. The sovereign is on the brink of another downgrade into non-investment grade territory; fresh gross domestic product (GDP) data indicate an economic recession in 2019H2; and business confidence is at a 21-year low. What cards can South Africa play? Does it have any aces to play? We believe that combining monetary stimulus and fast-tracking other economic reforms could boost economic growth by 0,3 percentage over the next 12 months.

Easing monetary policy to lighten the financial burden

Countries have responded to Covid-19 with a mixture of monetary policy and fiscal policy measures as part of a multi-faceted response. Major central banks have cut interest rates. This has been done to boost the global economy in an attempt to prevent longer term national, regional, and global economic downturns. For example, the US Federal Reserve (US Fed) cut rates by 50 basis points (bps) on March 3 to just below 1,25% and announced a further cut on Sunday 15 March to near zero. The Bank of England (BoE) cut interest rates on March 11 by 50 bps to a record low of 0,25%.

Where interest rates are already low, the ability to use rate cuts are more limited, and further measures of quantitative easing and adding liquidity into the market are under discussion. The European Central Bank’s (ECB) main interest rate, for example, is already at 0%. As such, the ECB announced measures to support bank lending and expand its asset purchase program by €120-billion.

Amongst the BRICS countries, the Reserve Bank of India (RBI) announced it would conduct US dollar – rupee sell/buy swaps in the foreign exchange market to ensure adequate dollar liquidity. It further announced in a statement on March 13 that it was “closely and continuously monitoring the rapidly evolving global situation and will take all necessary measures to ensure that money, debt and forex markets remain adequately liquid and stable, and continue to function normally,”. Elsewhere in the BRICS grouping, the People’s Bank of China (PBoC) cut several of its key rates and has urged banks to allow discounted loans and payment relief for exposed companies.

In addition to rate cuts, several countries are also supporting banks through credit easing measures, as the pandemic is expected to bring about cash flow constraints. These are expected to arise both from increased demand for short-term credit from households and increased demand for working capital from companies. The Bank of Mauritius, for example, said on March 13 it would offer ₨5-billion ($131-million) in liquidity support to businesses through commercial banks to cushion businesses from the impact of the pandemic. The central bank also reduced the cash ratio reserve requirements for banks from 9% to 8% to boost lending.

The BoE announced it would allow banks to release capital from their countercyclical capital buffer, a store of capital that aims to protect the banking sector in periods where aggregate credit grows sharply. This is to ensure banks can continue lending to households and businesses whose cashflow is under pressure. The BoE is also temporarily allowing banks to take on more risk to lend more and providing incentives to lend to SMMEs. Globally, small businesses are the lifeblood of economic growth as they create the majority of employment opportunities. Access to affordable finance is – at the best of times – a constraint on SMMEs in most countries in the world.

The South African Reserve Bank (SARB) has more leeway to cut interest rates than its counterparts in the US, the UK or the ECB. The local repo rate of 6,5% is joint 50th-highest in the world out of 166 countries. Admittedly, the SARB is already on a path of monetary policy easing having recently (in July 2019 and January 2020) made two 25 basis points cuts in the repo rate. At its policy meeting in mid-January, i.e. prior to the fallout emerging from COVID-19, the South African central bank also indicated scope for further rate cuts in 2020 on the back of a favourable inflation outlook.

The SARB has for many years said that the solutions to South Africa’s economic growth challenges lies with structural and policy reforms, and not lower interest rates. It defended this stance by indicating that a 25 basis points cut in the repo rate would provide only 0,1 percentage points of additional GDP growth over a 12 to 18 month period. At this stage, a boost like that would be more than welcome. There is no real risk to the inflation outlook from cutting interest rates – there is no demand-pull on consumers prices at the moment. A suggested 50 bps cut would boost GDP growth by 0,2 percentage points towards 2021Q3.




Fiscal stimulus … if you can afford it


On the fiscal front, stimulus packages are being agreed in some countries, which have the dual aim of boosting the economy and making funding available to cover rising costs of tackling the pandemic. Italian Prime Minister Giuseppe Conte earmarked $28-billion to this end, with half the amount to be released immediately and the other half to be kept in reserve. South Korea launched a fiscal stimulus package of $9,8-billion which includes supplementary expenditure for the health system and traders at outdoor markets.


Supplementary expenditure has also taken the form of emergency government transfers. US President Donald Trump signed a $7,8-billion emergency spending bill for state and local governments that reimburses costs they incur for fighting COVID-19. This is to include $3,1-billion to stockpile medical supplies, $300-million for tests and therapies for low-income people, and $7-billion in low-interest loans on small businesses that are particularly affected by the outbreak.


In order to create space for supplementary spending to tackle the epidemic, several countries have announced plans for increased government borrowing and relaxation of fiscal deficit rules. Germany’s Chancellor Angela Merkel announced a temporary suspension to Germany’s “black zero” rule, which insists that budgets must be balanced and deficits avoided, to allow new government borrowing.[xi] Meanwhile, the Italian government is seeking approval from Parliament to raise its debt-to-GDP ratio above its target.


Unfortunately, a major fiscal stimulus package is not an option for the South African government. Finance Minister Tito Mboweni, in his budget speech on February 26, indicated that strain on the fiscus will result in the country seeing its largest budget deficit (as percentage of GDP) in three decades during the coming 2020/2021 financial year. This comes after years of fiscal stimulus for an ailing economy that has stretched tax revenues and increased public debt significantly.


However, this does not mean that some fiscal response is not important. In order to stop COVID-19 from spreading to more South Africans and to prevent even larger long-term costs of a large-scale outbreak, additional funding needs to be made available. This includes additional resources for adequate health and testing facilities, and other prevention, containment and mitigation measures. Redirecting funding through existing budget line items would be preferable to increased borrowing.


President Cyril Ramaphosa said in an address to the country on March 15 that the Cabinet is “in the process of finalising a comprehensive package of interventions” to mitigate the expected impact of Covid-19 on the South African economy. He indicated that the package would consist of various fiscal and other measures is yet to be finalised, pending consultations with business and labour stakeholders.


Finance Minister Tito Mboweni said on March 16 that the National Treasury will use money from the National Disaster Fund to help finance the government’s response to Covid-19. He did not state how much money would be available. The minister added that if the situation requires it, more money would need to come from existing central government budget spending. In other words, money set out in the Budget Review 2020 will be reallocated to the response programme. It is unlikely that the fiscal measures planned will be comparable to those of the countries listed above.


Fast-tracking reforms as an alternative economic stimulus


For BRICS member Brazil, which is also struggling with government finances, fiscal stimulus is also not much of an option. Economy Minister Paulo Guedes has instead urged both houses of parliament to fast-track the government’s economic reform agenda. The minister argued that faster progress on a pipeline of reforms – aimed at boosting the fortunes of the economy and improving the business environment – would help shield Brazil from the external shocks of Covid-19.


Like Brazil, South Africa is already aware of the potential boost to the economy that microeconomic reforms could have. In the Budget Review 2020, the National Treasury augmented its baseline GDP growth forecasts with an upside scenario based on faster progress in the reform pipeline, arguing that implementation at a moderate pace of microeconomic reforms outlined in the discussion document “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa” will raise economic growth.


The National Treasury document – originally released in August 2019 and updated in October last year –envisioned additional GDP growth of up to 2,3 percentage points, compared to a business-as-usual scenario in which none of the reforms were enacted. The more recent Budget Review 2020 suggested that the moderate implementation of reforms could lift growth by around 0,2 percentage points this year and 0.4 percentage points in 2021 from the baseline. Even though the February baseline view would seem optimistic now given developments over the past few weeks, any growth-boost coming from reforms would support GDP growth.


Combined with monetary easing, the fast-tracking of economic reforms could lift local GDP growth by around 0,3 percentage points over the coming year. This will be a welcome boost: forecasts for growth in 2020 are dwindling as the Covid-19 impact deepens. The SARB will publish its latest economic growth projections on March 19 and the numbers are unlikely to be encouraging. A combination of monetary and economic reform actions could improve the short-term outlook somewhat.