Sarb foresees 370,000 initial job losses, 1,600 business insolvencies

Early projections by the South African Reserve Bank (Sarb) are that the 21-day lockdown, aimed at curbing the spread of the coronavirus, could see around 370,000 job losses and 1 600 businesses being declared insolvent in the country.

That’s the word from Dr Christopher Loewald, a member of the Sarb’s Monetary Policy Committee (MPC), who was speaking during the bank’s bi-annual Monetary Policy Review briefing on Monday.

Presenting via a live video broadcast, Loewald said the “growth shock” that the bank anticipates coming from the 21-day shutdown could result in a 2.6% contraction in real GDP “from a purely supply side”. The briefing included Reserve Bank Governor Lesetja Kganyago and other members of the MPC.

“These numbers are very uncertain and move around a lot … The outcome also depends on how long the shutdown lasts and then on the rate of pick up [by the various sectors] after the shutdown,” Loewald said.

“Part of the difficulty with a crisis like this [the global Covid-19 pandemic] is that it’s not just the supply, but also demand-side shocks,” he noted.

“We are also trying to estimate what kind of demand shocks we might get, and two variables here are job losses and business failures. For the formal sector, the shock that we see as a possibility is something like 370,000 jobs lost and we’re looking at something like 1 600 businesses that could [be declared] insolvent in 2020. These are big numbers,” he said.

Loewald, however, cautioned that these were “very early numbers” in terms of the Sarb’s forecasting process.

At the start of the briefing, Kganyago also warned that uncertainty around Covid-19 has made forecasting “nightmarish” for the Sarb.

“The Covid-19 pandemic is the biggest disruption to the global economy since the bankruptcy of Lehman Brothers in 2008,” the bank noted in its latest Monetary Policy Review, published to coincide with the briefing on Monday.

The bank, however, added that it has “space to respond” given that inflation is projected to remain under 4.5% this year and is likely to stay within the target range over the medium term.

At its last MPC meeting in March, the Sarb slashed its repo rate by 1%, bringing interest rates to a six-year low.

“Monetary stimulus can help mitigate the economic costs of the Covid-19 shock, by supporting the spending power of firms and households,” the Sarb also pointed out in its Monetary Policy Review.

“South Africa, however, suffers from significant, pre-existing growth constraints. Better long-term growth prospects will therefore require a range of interventions, many of them outside the domain of the central bank,” it added.

The review noted that the Covid-19 outbreak severely reduced output in the first quarter of the year and that the disruption is set to intensify in the second quarter. “After that, the outlook is uncertain, but most analysts expect a rebound which will push up growth by 2021, although more adverse scenarios are conceivable,” it said.

The Sarb now estimates that the economy will contract by around 2% to 4% in 2020, however, it cautioned these projections were “tentative”. At its last MPC meeting on March 19, the bank said it expected the South African economy to contract by 0.2% this year, however, this was before President Cyril Ramaphosa announced the three-week lockdown.

If South Africa’s recession accelerates into a contraction of more than 2% for 2020, it will represent the country’s worse economic contraction since the advent of democracy in 1994. The global financial crisis in 2008/2009 saw South Africa’s GDP shrink by 1.5% and resulted in around 900 000 job losses.

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