Reflecting on the year of the pandemic

17/12/2020 | By Admin

We will spend a generation digesting the year we have had. The worst health epidemic for 100 years has tested our resilience as a nation.

Early in the year, as the pandemic headed to our shores, business braced for dramatic consequences. We were not in a good state of readiness. A decade of state capture had left our key public institutions weak while our national finances were in trouble. When government acted decisively to lock down the country and stop the spread of the virus, the consequences for the economy were clearly going to be dramatic.

As organised business, there were two areas we quickly moved to address. First was to volunteer the resources that business can access. Business 4 South Africa and the Solidarity Fund were quickly established in partnership with government. Funds were raised and resources mobilised, including accessing global supply chains to source personal protective equipment and gearing local production to confront the pandemic, producing sanitiser and masks among much else.

We quickly engaged with government on how to confront the crisis. Clearly it was important that the health interventions were accompanied by economic interventions to protect the economy from the fallout of lockdown. As we highlighted at the time, business needed to come together on three main issues: defending the economy, working with labour to cushion the impact on workers and supporting the public health effort.

Overall, the health response was excellent, as BLSA CEO Busi Mavuso wrote at the time. Government communicated effectively with the public about Covid-19 and Health Minister Zweli Mkhize seemed to be everywhere, explaining how the virus worked, reinforcing the importance of health protocols and generally keeping South Africans assured that the country was reacting in an effective manner and that the health of its citizens was paramount.

However, there were weaknesses. Having declared a state of disaster in terms of the Disaster Management Act, some sweeping interventions failed to consider a cost benefit analysis that should have been applied to measures.

The most notorious example was the ban on the sale of tobacco products. SA and Botswana were the only countries to ban tobacco sales during the pandemic and Botswana lifted its ban early. The reasons given seemed as absurd at the time as they do retrospect. Numerous studies found that few smokers actually stopped smoking; all they did was buy cigarettes illegally, pouring money into the wallets of illicit traders. BLSA strongly advocated against the ban and it stayed in place for far too long. It has caused long-term damage to revenue collection on tobacco and alcohol and enabled the illicit economy.

Similarly, the ban on e-commerce sales early in the lockdown was nonsensical. Other countries did precisely the opposite – encouraging companies to switch to online sales and consumers to buy. It meant people could stay at home but the economy could still function. Economic activities that allow the economy to work while ensuring the virus can’t spread are exactly what should have been encouraged. We made this clear at the time and the ban was dropped in early May.

Another area that didn’t get much attention was the prolonged ban on drive-through restaurants. It was evident even early in the hard lockdown that the physical spacing between a restaurant’s drive-through service window and driver of the vehicle was adequate, and with masks and gloves, this was safe. The risk of infections from a drive-through restaurant is so low that no rational argument can support the ban – particularly when it was evident that the lockdown restrictions were decimating the entertainment sector including restaurants and bars. Yet the government kept this ban imposed through lockdown level four and allowed them to operate only under level three from 1 June. That’s nearly four months of lost revenue, which forced many food outlets to close.

Then there was the process of selectively allowing or disallowing businesses and industries to reopen and on detailed terms. Perhaps most memorable was the detailed list of “essential items” that clothing shops could or couldn’t sell (what shop would have wanted to sell swimming costumes in May anyway?). We went about this the wrong way. Instead of developing a list of what was not allowed – the activities that presented too great a health risk – government painstakingly compiled a list of what was allowed, thus banning everything that wasn’t on the list. This approach meant companies couldn’t adapt to fit a prescribed protocol for Covid-19 related work and were unnecessarily frustrated in their efforts to keep to doing business in the face of the pandemic.

These are but a few examples of countless pockets of the economy that could have continued operating without undue risk but simply weren’t allowed to. Despite rational arguments by representatives of numerous industries across the economy presented to government to reopen parts of the economy that posed little health risk, government was slow to assimilate the feedback into its policies.

Overall, though, our hospitals were not overrun, the peak of the first wave of infections arrived earlier and subsided quicker than forecasts. On the health front, the government did an excellent job.

The lockdown impact was obviously severe for the economy (and more so because of the unnecessary disruptions). It was critical that we needed a wide-ranging intervention to protect it through the health battle and support its recovery. That, however, came too slowly.

At one level, the economic leadership moved fast. The Reserve Bank cut interest rates swiftly and adjusted the rules for banks to allow them to increase liquidity and lending into the economy. But at another level we were left to wait while business confidence collapsed and investment disappeared. For that we are already paying the price, with SA’s GDP expected to contract 7% this year while it will probably take at least three years for our economy just to get back to pre-Covid levels.

Feedback BLSA received time and again from businesspeople who interacted with government, both in terms of lockdown restrictions and in terms of measures for economic rejuvenation, highlighted that while there was acute awareness of the urgency of the economic situation in pockets of government – including National Treasury and the Presidency – across government departments there was little such appreciation.  There was no sense of urgency.

As a result, the phase 2 and then phase 3 of the economic recovery plan came later than promised. The R500bn phase 2 intervention was eventually announced at the scale we had hoped for, but months later it is clear that the real impact has been smaller than promised. Phase 3, announced in October, is now the critical factor in the outlook for the economy.

To get to phase 3, government, business and labour engaged through Nedlac to come to a common vision of what needs to be done. Business, through B4SA, developed an extensive and detailed plan for interventions to deliver an economic recovery. Labour also drew up proposed interventions and in September the social partners came together to agree on a consolidated vision. At first, government dragged its feet but later engaged fully on the development of an agreed plan. This went to cabinet and informed the Economic Recovery Plan that was announced by the president in October. However, as we said at the time, what matters now is implementation.

The downgrades

Long before Covid-19 hit our shores, we were in a recession, with GDP having contracted 1.4% in the fourth quarter of last year and by 0.8% in the third quarter. Government finances were in trouble with debt levels continuing to climb. Finally, the last ratings agency that still gave an investment grade rating to South Africa cut our debt to junk.

BLSA had repeatedly highlighted what needed to be done to avoid a downgrade, years before it happened. The onset of Covid-19 merely compounded a bad situation. We had been advocating for structural reforms to turn around the performance of the economy and government finances. While the required reforms are numerous, a few quick wins in the most important areas – energy reform, spectrum availability and visa reform – might have supported the growth momentum we needed to convince ratings agencies our economy would turn the corner before our debt overwhelmed us.

Over the course of President Cyril Ramaphosa’s administration, he has committed to structural reform. There’s no reason to doubt the commitment but what is concerning is the capacity of the state to follow through.

One example is the request for proposals from independent power producers for new generation capacity. In October, Mineral Resources and Energy Minister Gwede Mantashe announced that the RFP would be issued in December. That has now been pushed out to end-January. Why didn’t it happen eight months earlier? Or three years ago when it was first promised?

Similarly, the long-awaited auction for more spectrum allocations for telecommunications companies was pushed out to March next year. It could have happened years ago – the original decision to begin the process happened way back in 2007.

The upshot of such delays, despite the economic crisis unfolding, were further credit downgrades on 20 November, this time by Moody’s and Fitch, which already had SA on sub-investment grade ratings, or junk status. Their latest downgrades pushed the country further into junk status – with Moody’s, we’re now two levels below investment grade and for Fitch it’s three levels below.

The downgrades result in a higher cost of borrowing for the state, hampering government’s already limited ability to deal with the country’s spiralling debt burden. Business, too, must operate within the debt ceiling provided by the government’s credit rating, so the cost of capital increases across the economy.

The budgets

This year might also be known as the year of three budgets. Much of what Finance Minister Tito Mboweni planned in what is normally the country’s official budget in February had to be rewritten because of Covid-19. That led us to the supplementary budget in June, or the emergency budget, as it was dubbed, followed by the medium-term budget policy statement (MTBPS) in October. The emergency budget was a critical speech to set out how we will turn around the serious damage to our fiscal position and the demands were high.

An important factor in each of the three is SA’s debt profile.

In the February budget, gross national debt was projected to be R3.56tn, or 65.6 % of GDP, by the end of the 2020/21 fiscal year and 71.6% of GDP by 2022/23. To prevent debt from overtaking GDP, the minister announced dramatic expenditure cuts including a wage freeze for public sector workers, which meant reneging on the third year of a three-year wage agreement.

Minister Mboweni introduced the concept of the hippo’s jaws in the emergency budget: “The top jaw represents the rising expenditure needs, which include social and economic infrastructure, salaries and wages, and now Covid-related spending. The bottom jaw, which is downward spending, is the tax revenue, plummeting due to the Covid impact on the economy.”

That was very important to both global sentiment toward South Africa and domestic confidence, as we said at the time.

In that budget, he said that due to Covid-19, fiscal deterioration had accelerated and gross national debt was expected to reach 81.8% of GDP in 2020/21. Having had to divert sizeable resources to deal with Covid-19 itself, cutting non-essential expenditure became ever more urgent and the forecast was that debt would be stablised at 87.4% of GDP in 2023/24. In the MTBPS, that was pushed to 95.3% of GDP by 2025/26.

The MTBPS set out a more realistic pathway to bringing our debt burden under control. But it depends fundamentally on government reducing consumption spending while protecting investment spending. The main component of consumption spending is wages, and the public sector wage bill is now a focus of attention and critical to our ability to rescue the public finances.

Should government fail in its attempt to reduce the original budgets for wages, we face a very real prospect of a debt crisis. As Minister Mboweni warned in the MTBPS, current trends will lead to a fiscal crisis like that seen in Argentina and Ecuador. That would be devastating to the whole country, effectively giving up sovereignty to our lenders.

The reasons for optimism

We have, despite the numerous self-inflicted wounds, come a long way this year. The health response has largely been appropriate and many lives were saved. We are clearly not out of the woods yet, and further interventions are going to be needed to cope with a second wave. As BLSA has argued, such interventions must balance the ease of implementation against the collateral damage to the economy. That has been keenly appreciated by government, as we saw in the focused additional measures that have been taken where infection rates are high.

We do, however, have a vaccine now on the horizon. We cannot let our guard down – the preventative measures of social distancing and masks must be strictly adhered to – but we can at least see an end point. That will depend on gaining access to vaccines through both global programmes and our own efforts.

On the economic front, there has been progress. The most important gains are in the energy sector, where government has committed to reform. The liberalisation of SA’s energy sector could also open up opportunities for small business participation and for big business to contribute to energy supply stabilisation. Much progress has also been made by Eskom to stabilise its operations. An important element has been enabling businesses to generate their own power. More can be done, including liberalising the licensing process for generation above 1MW and creating a mechanism to contribute excess energy into the grid. But we have begun to move down a positive road. Energy procurement processes that are under way and soon to start will also be highly positive. We have the opportunity to spark a new green energy industry with extensive opportunities for all South Africans.

We are also finally at the cusp of spectrum auctions to expand capacity of telecommunications providers in the new year. This should provide greater broadband across the country, lower prices and spur innovation. But it is important that we do not stop there – we need to complete the digital migration of television broadcasting to free up more spectrum.

There has also been extensive work on promoting infrastructure. This is now a central plank of the economic recovery plan. There is much more work to be done in this area to create a pipeline of infrastructure investment that delivers value-for-money public infrastructure that the private sector can invest in. In 2021, BLSA will be working on focused interventions to support the development of such a pipeline. Infrastructure provides an important mechanism to catalyse a wider economic recovery.

The pandemic has shown again that in times of crisis South Africans are able to pull together. The massive voluntary effort of business through Business for South Africa has been critical to providing resources to support government in the battle against the pandemic. The Solidarity Fund, which has raised over R3bn from a wide range of contributors from members of parliament to businesses, shows how we can jointly rally to confront a crisis.

This spirit of working together is going to be critical as we go into 2021 with the task of rebuilding the economy to be able to give every South African the opportunity to meet their full potential. BLSA is ready to play its part in that joint effort.

 This article is by BLSA.