“President Cyril Ramaphosa’s lockdown of South Africa to combat the Covid-19 virus comes at the right time,” says an economist of the NWU Business School.

Prof Raymond Parsons says the decision follows the precedent set by some other countries in successfully dealing with the virus.

He believes the announcement of a drastic lockdown for 21 days is a timeous, data-driven and proportionate response by the government. He says this step must be seen in tandem with a range of key economic measures designed to soften the impact on SMMEs and other vulnerable groups in South African society.

“It is therefore essential that these economic safety nets for groups at market risk must be rolled out as soon as possible before their situations deteriorate beyond repair.”

He says it is imperative for all stakeholders to adhere to the new regulations to maximise their success. “No government, other than the most repressive, will believe it can keep a country on lockdown for months – despite the exemptions, the economic effects will then become devastating.”  

According to Prof Parsons the bulk of the impact of Covid-19 on the economy will in any case be felt in the second quarter of 2020 and beyond, and South Africa is now likely to see a significantly negative growth rate for the year as a whole. Both macro- and micro-assistance measures are therefore needed to support the South African economy.

“These events suggest that Moody’s should now consider postponing any decision it may be contemplating to downgrade South Africa’s investment rating on 27 March.” He says the omens have not been good on what Moody’s may decide. Especially in the light that Moody’s recently reduced its outlook for South Africa from stable to negative, its scepticism about the impact of the latest Budget, and cutting its South Africa’s 2020 growth forecast to 0,4%.

The fact that the expected Moody’s decision may already be thought to have been priced in by the markets to some extent does not mean that South Africa would not benefit from a Moody’s breathing space.

Prof Parsons says in the event that Moody’s joins the Standard & Poor and Fitch rating agencies in downgrading South Africa to sub-level investment, it would trigger putting the economy into universal junk status, with various unwelcome economic consequences that South Africa would rather avoid.

“First prize would still be for South Africa to retain a general positive investment rating to facilitate access to certain future foreign loans and to enjoy lower borrowing costs. A negative decision by Moody’s would therefore come at a time when the South African economy is grappling with serious external and internal headwinds and does not need additional bad news if these are not absolutely necessary right now.”

Prof Parsons explains the reasons for Moody’s to consider not cutting South Africa’s investment rating now flow entirely from the recent dramatic impact of Covid-19 globally and on the South African economy:

• There is heightened uncertainty all round as to what the cost to economies will be once the coronavirus has run its course. Economic forecasts are being constantly revised in all countries, including in South Africa, as a result of this huge exogenous factor. But it is agreed that whatever kind of lockdowns are decided on by various countries, there will be a heavy cost in GDP, unemployment and economic disruption, including a sharp slowdown in world economic growth.
• As a developing nation, South Africa has shown itself to be capable of good leadership and a willingness to take the immediate steps necessary to implement mitigation and control measures to cope with Covid-19 from both a health and an economic point of view. This has been reinforced by President Ramaphosa’s latest statement to take more decisive and drastic steps.
• Although the South African economy is in any case in a vulnerable position, the government, the SARB and the private sector have already announced steps to limit the economic damage to South Africa within the policy constraints that exist. Some targeted assistance measures have also already been revealed. The keeping of one simple long-standing promise by the government and large corporations to ensure payment of small business suppliers’ invoices within 30 days would be helpful in these cash-strapped times.
• There are still hard choices to be made in the reprioritisation of state spending, such as devoting fewer resources to dysfunctional state-owned enterprises such as the SAA and more to saving small business. Ideally, South Africa may need to spend up to 10% of GDP if a “worst-case scenario” of the socioeconomic consequences of Covid-19 for the country should materialise.
• Fortunately, many of the policies designed to protect the GDP from Covid-19 converge with the pro-growth policies to which the government is already committed. This may well give them additional impetus, and also utilise a strong collaborative spirit already developing to confront Covid-19. Polices and projects already agreed upon generally need to be implemented more rapidly now.

“In the light of the above, Moody’s may well have already decided that, while leaving South Africa’s outlook on  ‘negative’, it will postpone its decision on the investment rating for South Africa until the exogenous Covid-19 impact is clearer.”

Prof Parsons concludes that the Sword of Damocles will still be there. “If Moody’s were to decide to nonetheless downgrade South Africa on March 27, it is hard to see how such a message will at this juncture help the country to meet the criteria set by Moody’s itself for turning the South African economy around. Their decision in the current highly abnormal circumstances cannot be based on technicalities, but should involve on good judgement.”