Six months after president Cyril Ramaphosa declared a national state of disaster, South Africa has done a bad job at saving livelihoods and lives. After implementing one of the world’s most stringent lockdowns, as measured by the Oxford Covid-19 Government Response Stringency Index, Gross Domestic Product (GDP) – the value of all goods and services produced in the economy – contracted by an unprecedented 51% during the second quarter of 2020.
Like many countries, Statistics South Africa (Stats SA) always presents its quarterly GDP growth figures on an annualised and seasonally adjusted basis. The agency calculates the percentage change between two consecutive quarters and annualises it to show what would happen if the trend continued for the whole year. The seasonal adjustment removes factors that can distort the GDP number, such as weather and holidays. However, since the lockdown will not continue in its initial form for the rest of the year, this number is misleading in the current context. The seasonally adjusted but not annualised decline in GDP was 16.4%.
Lest we forget, South Africa was already in its worst post-apartheid economic crisis before the start of the lockdown on 27 March. GDP per capita, an international benchmark of average living standards, which takes into account a country’s population growth, had declined for five consecutive years between 2015 and 2019. There had been two recessions in two consecutive years in 2018 and 2019. There had been three consecutive quarters of declining GDP. The country was heading for its third recession in three consecutive years.
Therefore, the second quarter GDP contraction, the fourth consecutive quarterly decline, was the equivalent of a cancer patient having a heart attack. The Reserve Bank said: “Of all the countries for which we have comparable data, South Africa had one of the worst GDP outcomes under lockdown.” Out of 50 advanced and emerging economies, only six – Peru, India, the United Kingdom, Spain, Mexico and Malaysia – had a larger GDP contraction. Alexander Forbes economist Isaah Mhlanga said 13 years of growth has been wiped out in one quarter. “We are back to the second quarter of 2007’s level of real GDP,” he said.
Economy already ailing
Trade & Industrial Policy Strategies (TIPS), an economic policy think-tank, says available indicators suggest that the economy had levelled at about 10% lower than its state in January by early September. In the Western Cape, which has also been hit by a collapse of tourism, small business turnover was 25% lower than it was in March. With the lockdown moving to alert level one on 20 September – on the back of a sharp decline in daily infections since the last week of July – there should be a rebound from a low base during the third and fourth quarters.
“But as the economy has opened up, load shedding has become a binding constraint,” TIPS said. Neva Makgetla, a TIPS economist, worries about what will happen when the government stops the support that it has provided through increased social grants and Unemployment Insurance Fund (UIF) payments at the end of September. Nedbank has now forecast a higher GDP contraction for 2020 of between 9% and 9.5% compared with a previous estimate of an 8.1% decline. “Given the weaker growth trajectory, the Reserve Bank’s monetary policy committee is likely to give further rate cuts some serious consideration,” the bank said.
Between 1994 and 2019, South Africa’s GDP per capita increased by only 28.1%. By comparison, “per capita incomes in India and China are now 300% and 760% of what they were in 1995,” says Hendrik du Toit, the CEO of Ninety One, an asset management company. During 2020, GDP per capita will decline by about 10%. At the end of the year, GDP per capita will be only 15% higher than it was in 1994. It will be where it was in 2005. After two more years of declining GDP per capita, on the back of unprecedented austerity measures of R250 billion that will be implemented between the 2021 and 2023 fiscal years, the income of the average South African will be barely higher than it was in 1994.
There are two issues that must be discussed. These are the lack of an economic response from the government and the severity of the lockdown, which destroyed the economy while failing to prevent the country from having the eighth highest number of infections in the world. It was the worst of both worlds. In a briefing to members of the South African National Editors Forum (Sanef), Ramaphosa said he had wanted a R1 trillion stimulus. But the government realised that it was constrained. The country was in a fiscal bind. The R500 billion stimulus package that was eventually developed was worth almost 11% of GDP, he said.
Stimulus packages muddled
Ramaphosa rejected the assertion that his stimulus package had allocated little new money. He said the loans from the international Monetary Fund (IMF) and the New Development Bank (NDB), worth $4.2bn (R70.3 billion) and $1 billion (R16.7 billion) respectively, and the allocation of R50 billion to grants, were new money. “No peer country that we know of has done as much as we have. Our package is at the level of developed countries. We have gone big. R100 billion for mass employment is a big number,” he said.
The original stimulus package had two components. There was below-the-line spending that would not go through the budget that was worth R240 billion. This included a R200 billion loan guarantee fund and R40 billion that the UIF would pay people who were temporarily laid off. There was also above-the-line spending that would go through the national budget, and was worth R260 billion. However, Ramaphosa’s stimulus package is now in tatters. The banks whittled down their initial contribution to R100 billion. Recently, a Banking Association of South Africa (BASA) statement said the guarantee had been further reduced to R67 billion.
By 29 August, the banks had lent only R14.5 billion. Applications for new loans were expected to peak soon, allegedly because businesses were reluctant to take on new debt in such a weak economy. It is clear that the banks have used their normal credit-granting criteria. Most people who have received loans would probably have received them without the guarantee. In other words, there has been no additionality. Latest Reserve Bank statistics showed that the growth of bank credit extension to corporates had collapsed to 1.6% during the year to end-July. Since the loan guarantee will not result in an increase in bank credit to corporates, it would be disingenuous to count it as part of the stimulus package.
Ramaphosa’s responses to editors show that he does not understand his own budget and stimulus package. A fiscal stimulus refers to new spending in the economy and not the financing of it, which is a separate issue. Therefore, a country’s borrowing can increase while its actual spending declines. The IMF and NDB loans and the social grants are not new money. The loans were taken to partly finance an expected R300 billion collapse in state revenues. A mantra of global stimulus packages is to “go big and go early.” But during the second quarter, in the midst of the country’s worst depression in a century, government consumption spending declined by 0.9%, according to Stats SA.
In a presentation to parliament on 1 September, National Treasury said it had allocated R122.4 billion towards the Covid-19 response. But R109 billion of this allocation was financed through budget cuts. Therefore, the new money in the budget was only R13.4 billion or 0.3% of GDP.
The allocation to “mass employment” was R6.1 billion and not the R100 billion the president referred to. Treasury said the government had only spent R18 billion during the five months to August, which was equivalent to only 14.7% of the R122.4 billion allocation. This included only R1.1 billion that had been spent on “mass employment”. At this rate of underspending, it is likely that by the end of the fiscal year in March 2021, there would have been a decline in state spending. The only part of the stimulus that will be real will be the R40 billion UIF payments.
Lockdowns not a virus cure-all
Ramaphosa conceded that the government implemented a hard lockdown. For it to be successful, it had to be stringent. Countries that did not have hard lockdowns had higher rates of infections and deaths. However, there is no correlation between the severity of a lockdown, as measured by the Oxford Stringency index, and success in bringing the coronavirus under control. The index is a composite measure based on nine responses to the coronavirus such as school and work closures. If one looks at countries that have a population of more than 1 million people, Peru has the world’s sixth-most-stringent lockdown, but it is first in the world in terms of deaths per 1 million people. Chile has the world’s ninth-most-stringent lockdown, but it is sixth in the world in terms of deaths per 1 million people.
On 1 September, South Africa’s index was at 77.78, one of the highest in the world. At the height of the lockdown, during April, it was at 87.96. Research conducted by the Human Sciences Research Council (HSRC), a government social sciences research and policy agency, has shown that there was a high level of knowledge about Covid-19 prevention and compliance with lockdown regulations. “The majority of people adhered to the regulations. The results show that 99% either left their homes for food, medicine and social grants or stayed at home.”
Research by the HSRC and the University of Johannesburg also showed a high level of compliance with mask-wearing regulations with 73% always wearing masks in public and 15% wearing them most of the time. In Singapore, 66% of people always wear a mask. Many European countries were slow to embrace masks. When regulations were introduced, they were less stringent than those in South Africa. In many European countries and in the United States, the percentage of the population that wears masks is far lower than in South Africa.
However, after analysing epidemiological curves, it soon becomes clear that one has to look east for lessons on how to bring the coronavirus under control. Many Asian countries have done so in a month or less. Some have achieved success without lockdowns, such as South Korea, a vibrant democracy with a population of 51.2 million and a stringency index of 54.17. In February it had the second-largest number of cases after China. On 1 March daily new infections peaked at 1 062. Two weeks later they had dropped to 74. The country has had 22 285 cases and only 363 deaths. Japan, another democracy, has a population of 126.5 million and a stringency index of 30.56, which is lower than Sweden’s 37.04. The country has had 75 218 cases and only 1 439 deaths. But South Africa, with a population of 59.6 million, had 649 793 cases and 15 447 deaths by 13 September.
Lockdowns delay the spread of the coronavirus. They buy time. “But they actually have not broken the transmission chain,” says Bruce Aylward, an advisor to the World Health Organization (WHO) director-general Tedros Ghebreyesus. Also, lockdowns cannot continue indefinitely. At a press conference in June, Ghebreyesus said: “The single most important intervention for breaking chains of transmission is not necessarily high-tech and can be carried out by a broad range of professionals. It’s tracing and quarantining contacts.”
Ghebreyesus said South Korea had shown the world how to suppress the coronavirus without vaccines or therapeutics. His message was for governments to implement testing, contact tracing, isolation of infected people and quarantining their close contacts who may not be infected. While wearing masks, hand hygiene and social distancing are important to prevent infection, the decisive interventions are implemented after a cluster emerges. For example, in South Korea in May, several people tested positive after visiting nightclubs in Seoul. Within two weeks the government identified 46 000 contacts and got them quarantined. In this way, each time a cluster emerges, in a church or call centre, the flame is extinguished quickly.
Economic lockdowns too blunt a tool
According to James Stock, a Harvard University economics professor, lockdowns are neither necessary nor sufficient to suppress Covid-19. “Economic lockdowns alone are a blunt, costly and only partially effective instrument of public health.” He has called for rapid testing using a cheap paper-strip test and other measures such as masks and targeted bans of superspreader events. “Mathematically, rapid testing and isolation acts like herd immunity: by reducing the chance that a susceptible individual comes into contact with an infected one it can drive the basic reproduction or “R” number below one.”
There is a view that contact tracing cannot be implemented once community transmission is out of control. But Ghebreyesus said Mike Ryan, his advisor, had helped trace 25 000 contacts a day in North Kivu in the Democratic Republic of Congo where 20 armed rebel groups operate. “If there is a single failure for many of our countries, it is our failure in contact tracing because we have lame excuses, saying it’s too many and they are difficult to trace because they are too many. Trust me: there is no too many, even in a war situation.”
South Africa’s lockdown was too long and too stringent. Yet, almost six months later, the pandemic has not been brought under control. More people have been infected and died than would have been the case if other effective public health measures had been implemented. The lockdown covered up the government’s failure to implement other less costly and targeted public health measures. There was a chaotic public sector testing system where results took up to two weeks to arrive. In May, Ramaphosa told editors that the government was tracing only two contacts for each infected person compared with 20 in South Korea. But identifying two contacts per person was pointless if the results were taking so long to arrive.
South Africa can finance a proper stimulus package. Brazil had a much higher debt-to-GDP ratio than South Africa at the start of the crisis. But it still provided a R1 800-a-month corona voucher for 66 million people, 30% of the population, which has pushed poverty levels to record lows. Every country that has implemented a meaningful stimulus package could not afford it. When new clusters or a second wave of infections emerge, the government should not shut down the economy again. It can implement other targeted and localised public health measures to contain future outbreaks of the coronavirus.