On Sunday evening, President Cyril Ramaphosa declared a national state of disaster and made it clear how serious the coronavirus outbreak is being viewed by the government. Not only in terms of the health and well-being of the people, but also the impact it will have on our economy.
The South African economy is already weak and the country can’t afford another blow that Covid-19 will deliver. However, the president has said that the cabinet is putting together a package of interventions to mitigate the impact.
The Impact of Covid-19
What this package includes will be important, as the potential for disruption will be huge. Last week, the turmoil experienced in the financial markets shows how worried investors are about the impact of the coronavirus on a global level.
There is still a lot of discussion taking place on how long the impact of Covid-19 will last, with investors debating as to whether the coronavirus could derail the global cycle.
Global chief economist at Morgan Stanley, Chetan Ahya, has said that with the harsh drops in global asset markets recently, the impact to global growth in the first half of the year could be sizeable due to the coronavirus. However, there needs to be some clear perspective on the outlook for the full year. At the beginning of the year, Morgan Stanley held a positive view on the world economy and was expecting a rebound in growth, however, the outbreak of Covid-19 has changed this. The disruption to economic activity will slow global growth this quarter.
The question is though whether the shock will extend beyond that.
Going Quarter by Quarter
Morgan Stanley believes that if the virus can be contained to the end of March and the impact on global production is limited to the first quarter, then the world economy could only take a short term knock and that recovery over the rest of the year would be strong. However, if new cases continue to rise during April and May then the effects of Covid-19 will be amplified.
This will then have a huge impact on the profitability and cash flows of companies, especially, to those that have high levels of debt.
Ahya noted, if the dislocations in asset markets continue into the second quarter then a tipping point could be marked by a sharp tightening in financial conditions, which will worsen the impact on growth due to falling capital expenditures, weaker corporate confidence and cutbacks in hiring.
A global recession could hit if the virus and its impacts are not contained by the third quarter according to Morgan Stanley.
The Risk to South Africa
South Africa is not able to escape these global forces and if the number of local cases grows then businesses could be heavily disrupted.
Director at Ninety-One, Jeremy Gardiner, said the impact could be significant as South Africa is struggling to grow as it is. For instance, East London, survives on Volkswagen and BMW factory jobs, but if one person in the factory gets sick then the entire factory will close and you are not able to make cars from home.
Tourism will also take a hit, as travel from high risk countries has been halted and these countries make up a large part of South Africa’s tourists. Gardiner pointed out that one permanent job is created in South Africa for every eight tourists. However, countries are going into lockdown and travelling will stop. Cancellations are already occurring for the coming months and smaller tourism operators will feel the biggest impact as they do not have the balance sheets to sustain them through low cash flow periods.
Making Ends Meet
Many small businesses across several sectors are feeling the impacts already with lower orders and supply chain disruptions.
Gardiner pointed out that global supply chains are under threat as China is the workshop for the world and if China is not able to produce then nobody can get their products and if products can’t be sold then revenues take a hit.
Businesses that will be hit the hardest will be those that carry a lot of debt as they will not be able to generate enough to cover repayments.
Omar Hassan, an economic development specialist said that the coronavirus may bankrupt more people then it kills, which is why the government’s response is important. Rossouw said that there is a state of urgency and a realisation that the issues need to be dealt with, which is good news.
Article Source: https://www.moneyweb.co.za/news/south-africa/how-much-could-covid-19-impact-the-sa-economy/