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South Africa has joined Italy, Spain, Germany and California among other countries and regions in announcing a shutdown to combat the spread of Covid-19. It is an action necessary to quell the infection rate.
Heading into the pandemic, South Africa was already in recession. A nationwide quarantine will see growth steeply decline further as only the skeleton of the economy is allowed to function. Shops and businesses that are not key to the survival of people and the economy will be closed. The mines will be put on care and maintenance.
In a request for national unity, a charitable fund has been set up, seeded by the state to help those affected by the virus. The Rupert and Oppenheimer families have donated R1bn each to help small enterprises.
Heading into the pandemic, South Africa was already in recession. A nationwide quarantine will see growth steeply decline further as only the skeleton of the economy is allowed to function.
A number of measures have been announced, with more detail to follow, to help SMEs and informal traders weather the storm. The measures to contain the virus are likely to be painful but the state is following in the footsteps of the countries that have been most effective in flattening the curve and in the footsteps of countries that have tried to soften the blow of the shutdown on the economy.
South Africa is not China though; we are on the brink of sub-investment grade status and have little fiscal space to manoeuvre. There is a question mark hanging over many leveraged SA Inc firms.
The impact on markets is far from certain. The steep decline in activity in China followed by a gradual recovery has seen the Chinese stock market materially outperform global markets over the past month.
Shutting down large swathes of the country turned out to be the right call for both citizen health and the markets, despite the short-term consequences. South Africa is not China though; we are on the brink of sub-investment grade status and have little fiscal space to manoeuvre. There is a question mark hanging over many leveraged SA Inc firms.
Eskom will get a reprieve from demand but it is not clear at all if they will be able to use the time to do deep maintenance. There will be global consequences too. The mines on care and maintenance will mean reduced platinum, palladium and rhodium production. At the moment, global auto manufacturers may not be looking to scale up but they will need to eat into global inventories.
It’s far from clear that Moody’s will view the fiscal response in a favourable light and a downgrade on Friday evening must be on the cards. However, a downgrade has been priced in for some time.
In addition, the shutdown presents opportunity – for employees that are able to, to test working from home, and students to test remote learning. We may well learn new methods and skills that improve productivity when the crisis abates.
Above all, this presents an opportunity to demonstrate national unity in a period of hardship. There will be investment consequences and we will analyse and incorporate them in our investment process (remotely, from home) but above all else, it is an opportunity for the nation to demonstrate its willingness to suffer short-term economic pain to save the lives of the vulnerable.
No doubt the next few months will be tough for both workers and business owners, but we may well be sowing the seeds for greater unity and purpose subsequently.
About the author
Chris holds an MSc (Statistics) and is a CFA. He joined Investec in 2007 as a quantitative analyst for the institutional equities team. He started covering strategy from the beginning of 2013 and headed up the research team from 2017. At the beginning of 2019, he moved to the Wealth and Investment (SA) Team as Chief Investment Strategist. He is also a member of the Global Investment Strategy Group and Chair of the Global Sector View Group.