Impact of virus will hurt economy for months to come

The full impact of the coronavirus pandemic’s on earnings, cash flow and employment is expected to last far longer than a three-week lockdown, and South African retail and consumer-focused businesses – especially in tourism and hospitality – are feeling the pinch, according to an academic.

With the 21-day nationwide lockdown in place, University of Stellenbosch business school guest lecturer, Jason Hamilton, said the full effects would “ripple through all sectors and industries – at least until the end of this year, in an economic cycle like no other we have ever seen”.

The pandemic, said Hamilton, would see South Africa’s GDP retracting by between 2.5% to 3.5%, with some models estimating up to 5%.

He said Moody’s downgrade of South Africa’s credit rating would result in further outflows, which the country could ill afford, with the cost of debt increasing.

“Up to the lockdown, businesses were able to trade and generate some earnings to keep the lights on, keeping employees employed and earning some level of income.

“A total lockdown will bring significant retrenchments across all sectors and industries, with cash flow and earnings under threat in businesses of all sizes.

“It is also looking likely that some form of control and restrictive measures will remain in place for months to come, which means we will be dealing with this until the end of the year – even if we look to China, which now has a flattening curve, they are more than five months into the battle against the disease while trying to keep their economy alive,” Hamilton said.

Data from the last 11 global recessions indicated that it took on average a year-and-a-half for the economy to start recovering.

Hamilton said: “Recessions we have seen, and we have traded through them, and the average of 18 months to the start of recovery in theory gives us a timeline to follow. But the market sell-offs and economic cycle (reduced GDP growth or recession) we are busy entering are based on an event, not on fundamentals or underlying economic systems issues, which means it’s very difficult to predict how long and how impactful it will be.

“What we can, however, focus on is that it is event-driven and hence the recovery and comeback should be quick, the question is just when.”

Unlike many developed economies where interest rates are already close to zero, Hamilton said it was a positive that the SA Reserve Bank still had “significant room to provide support of at least 300 basis points” even after the repo rate was lowered by 100 basis points, as the inflation outlook remained within the target midpoint.

“We have seen significant cuts in short succession from the economic powerhouses acting very quickly, which further supports the view that South Africa has further room and drastic action can and should be taken.

“The balancing act is, however, on inflation targeting and the exchange rate,” he said.

Access to liquidity would be key in the months ahead, which would require direct action from government.

“Credit will need to be extended to individuals and companies to bridge cash flows as the trading environment tightens.

“This will require support from government. And the announcement by President Cyril Ramaphosa of the first phase of these, is to be welcomed.”

– brians@citizen.co.za

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