Coronavirus may Prolong SA Recession
Economists say the technical recession in South Africa is likely to be prolonged by the effects of the coronavirus (COVID-19). This is because there is a disruption in the export and import of goods, which significantly contribute to the country’s gross domestic product (GDP).
“The biggest impact has been the change in supply chain dynamics, where companies that are trading with China are seeing a slowdown in goods coming in and going out. That is the biggest negative impact for our [South African] economy,” said economist Christie Viljoen.
Considering that China is South Africa’s biggest trading partner, Viljoen said that the slowdown will affect the country’s economic performance in terms of manufacturing and GDP.
“The supply shock relates to the inability of firms to continue operations because facilities have been disrupted by government restrictions or infection of employees,” reads a report by S&P Global.
Quantifying the effect of the Coronavirus
To quantify the effect, for every 1% decline in economic growth experienced by China, South Africa will shed 0.2% due to its trading relations with the country. Viljoen estimates that the Chinese economy will possibly grow by 5%, while Moody’s and S&P Global project 4.8%. Both figures have been revised from the early number of 6%.
The National Treasury’s latest 2020 economic growth forecast stands at 0.9% and Moody’s sees a 0.4% growth for the South African economy. Azar Jammine, director and chief economist at Econometrix, said to Unmask Africa that South Africa’s “economy will be lucky to get any positive growth whatsoever”.
What is a “[Technical] Recession”?
According to Statistics South Africa (Stats SA), the technical recession was the result of two consecutive quarters of negative growth in the third quarter (-0.8%, which was revised from 0.6%) and the fourth quarter (-1.4%) of 2019, amounting to an annual growth of 0.2%. This was not in line with the National Treasury’s projection of 0.3%, Reserve Bank’s 0.4%, as well as the IMF, World Bank and Moody’s figure of 0.7%.
“Transport and trade were the main drags on overall activity,” according to Stats SA. The transport and communication industry encountered a -7.2% decrease (-0.6 to GDP) and trade -3.8% (-0.5%).
“The indirect effect is that of supply shortages resulting from the shutdown of many activities overseas in order to prevent the virus from spreading,” explained Jammine. “In South Africa’s case because of the high dependence on China, the Chinese shutdown is also likely to be quite negative.”
Main Industries Impacted
He continues to say, “Specifically, the motor industry is getting very worried because 60% of the components used in vehicle assembly plants in South Africa are imported.”
“Forget the technical recession; the recession will continue,” said Jammine. He added that the Coronavirus further has an impact on tourism-related activities as there are cancelations of non-essential flights, booked accommodation and event venues.
Mike Schussler, an economist at Economists.co.za, told Unmask Africa that “tourism is now bigger than gold mining and coal mining combined. It is where we (South Africa) could feel the impact”.
The International Air Transport Association (IATA) said last week Tuesday that African airlines may incur a loss of $40 million. “A potentially devastating hit to often struggling airlines counting on lucrative Chinese routes to fund expansion,” reported Reuters.
The wide-ranging impact of the Coronavirus on the Continent
Last month saw Kenya Airways and RwandAir suspend all flights to and from China until further notice. “The air travel demand for Ethiopian Airlines has declined by 20% due to the coronavirus,” Tewolde GebreMariam, chief executive officer of Ethiopian Airlines, Africa’s largest carrier, told Reuters.
On the other hand, the current decrease in certain commodity prices are likely to affect a number of African countries that are dependent on exporting raw materials, ranging from oil to copper.
Schussler said the continent’s countries generally conduct intercontinental trade rather than intracontinental trade and therefore, the slowdown of economic activities in major economies such as China, Japan and South Korean will affect its nations.
An example is the decrease in the use of oil-consuming transportation such as airplanes, buses and personal vehicles. It has led to OPEC (Organization of Petroleum Exporting Countries) seeking a deal with its allies, aimed at cutting down output by 1.5 million barrels per day to avoid flooding the market with oil and further price decrease.
“When the price of oil falls, Nigeria, Angola, Equatorial Guinea and the like make less money,” said Schussler.
In the South African case, despite the value of gold increasing, “it is our third biggest export and so, it is not going to have a great impact on our export performance but likely for South Africa, our import of oil will also drop in price,” added Schussler.
Cases of the Coronavirus in Africa
South Africa’s first Coronavirus case, which was of a 38-year-old man, was confirmed on Thursday, 5th March, in the KwaZulu Natal Province. The second case was reported on Saturday, 7th March, in the Gauteng province. The person, who is a 39-year-old woman, was in direct contact with the first case.
Sunday, 8th March, saw the confirmation of the third case: the wife of the man who had the first confirmed case.
“We confirm that we traced all 10 of these individuals. Nine of them had returned to South Africa. The tenth did not and is therefore not in our country,” said the National Institute of Communicable Diseases. Results of the remaining six are expected by Tuesday.
Viljoen said that further local cases may have a greater consequence on economic activities.
Both Viljoen and Schussler said a cut to interest rate may be helpful. It may occur during the next Reserve Bank’s Monetary Policy Committee meeting from 17th to 19th March. Nonetheless, the government’s purse is tight with mounting debt. As a result, the government is less likely to pour more money into the economy in the form of a stimulus package.
Algeria, Nigeria, Tunisia, Egypt and Senegal have confirmed their first cases of the virus. Symptoms of the virus include coughing, sore throat, malaise, shortness of breath, breathing difficulties, headaches and fever.
It is arguable that other African countries for whom China is a significant trading partner such as (in order) Egypt, Morocco, Nigeria, Ethiopia, Algeria, and many more, will also experience adverse effects on their economies.[efn_note] Johns Hopkins School of Advanced International Studies (http://www.sais-cari.org/data-china-africa-trade) [/efn_note]
The Coronavirus began in the central Chinese city of Wuhan in December. So far, there have been 110,034 cases globally, 3,826 deaths, 90 countries outside of China have reported infections, and 62,271 people have recovered, according to Reuters Graphics on Monday, 9th March.
On 09/03/2020 at 0800 GMT+2, the Rand was trading as follows:
- Dollar/Rand: R16.23 (Compared to R14.66 in November 2019)
- Pound/Rand: R21.23 (Compared to R19.09 in November 2019)
- Euro/Rand: R18,49 (Compared to R16.78 in November 2019)
Reporting by Gaby Ndongo. Editing by Magnificent Mndebele & Kupakwashe Kambasha.
