GDP shrinkage of 12%: It’s not the virus, but the lock-down, stupid!

Johannes Wessels (@johannesEOSA1) & Mike Schüssler (@mikeschussler)

At the end of the initial 3 weeks lock-down a GDP decline of about 5% was considered as quite a catastrophic outcome. Even at that level, it was considered worth the price since delaying the spread of the Covid 19 virus would give a window of opportunity for the health sector to get beds, ventilators and care protocols in place for the spike that would inevitably come.

The minister of trade and industry (dti), Ebrahim Patel, however dismissed the negative projections of economic shrinkage as mere “thumb-sucking”.

After prolonging the hard lock-down with just a gradual easing to level 4 to end May, the growing queues of the hungry waiting for food parcels, the increase in the claims from the unemployment insurance fund and the drastic shrinking of the state’s purse, would make a 5% decline in GDP a dream outcome.

The GDP figures for Q1 2020 will only be known end June. Data from other countries indicate that those whose governments had opted for a hard lock-down are in for excessive economic damage.

Change in GDP trend is the difference between growth in 2019 and 2020 1st quarters, implying that the Philippines that experienced a change of -6% went from 5.9% GDP growth in Q1 2019 to -0.1% in Q1 2020. This chart reveals the following:

  • Countries with a hard lock-down that kept only essential services and providers open, saw an average decline of 5,2% in GDP trend.
Continue reading “GDP shrinkage of 12%: It’s not the virus, but the lock-down, stupid!”

Enterprises, unlike bears, don’t hibernate: lockdown will cause the death of firms and people

Johannes Wessels
@johannesEOSA1

Government’s decision for a stringent lockdown has put at least 100,000 formal enterprises – incorporated and sole proprietorships – on death row by effectively freezing the economy. Unlike bears, firms do not hibernate well: without customers and clients buying their goods and services, they starve and die.

Business relief measures by the government and the funds established by the Ruperts, Oppenheimers, Motsepes and others may enable some enterprises to pull through. But a substantial percentage of formal SMEs will not. Not with an economy that is likely to retract by between 6 and 10%.

Enterprises are already in a predicament and have run up more losses than profits since 2014. SARS data shows that the assessed losses exceed the assessed taxable income for the period 2014 to 2018 by R830 billion (Figure 1).

An economy already damaged by anti-growth policies has now been dealt a vicious blow. The damage is systemic and a systemic approach is required to restore a healthy business environment.

Figure 1: The pre-Covid 19 situation of SA firms was dire

The economy doesn’t resemble Eskom’s electricity supply. Load-shedding means no electricity during the power lockdown, but when the switch is thrown on again with the transmission lines conveying electrical current, the lights burn, the fridges cool, the stoves cook and TVs entertain just like before. 

Continue reading “Enterprises, unlike bears, don’t hibernate: lockdown will cause the death of firms and people”

Lockdown? Or is it perhaps meltdown?

Johannes Wessels
@johannesEOSA1

Halfway into a five-week lockdown it is appropriate to compile a kind of “balance sheet”. When the lockdown was announced, Pres Ramaphosa made it clear that protecting lives against Covid 19 was paramount: a position he reiterated when prolonging the lockdown.

For the ANC Government, all other considerations weigh less and may be sacrificed. Mutating from a supreme commander in military camouflage uniform rallying his troops to “kill the virus” to a pope like appearance during Easter sympathizing with the population for carrying the heavy cross, almost like Simon of Cyrene, Ramaphosa has been lauded all around as “bold” and “presidential”. The few voices that since the beginning have argued that severe restrictions that limit fundamental freedoms would fuel poverty and unemployment, were brushed aside as being both inhumane and wrong.

To date it is uncertain whether the lockdown, the wide application of Bacillus Calmette–Guérin vaccine in SA or any ther factor has contributed to the (still) low infection rate in South Africa. What is dead certain is that the economy (already in a critical condition prior to the appearance of Covid 19) has been rushed into ICU to a position close to the door where the dead are wheeled out to the morgue.

Read EOSA’s proposals on how Government can assist SMEs by cutting CIT and exempting those with a turnover below R2.5 million from VAT.

Government has, as yet, to indicate its estimates of the economic impact of the lockdown measures, e.g.:

  • the decline in VAT receipts;
  • the decline in CIT (and for sole proprietors, the decline in personal income tax);
  • the additional costs of demands on the UIF;
  • the additional costs of deploying the military and the police at the current levels;
  • the cost of measures to support the informal traders, small enterprises and other assistance measures to support businesses;
  • the support measures to assist businesses in the hospitality industry;
  • how these would impact on the budget deficit and what the implications are for government debt.
Continue reading “Lockdown? Or is it perhaps meltdown?”

The economy at an irreversible tipping point, caving in like the Antarctic ice shelf?

Johannes Wessels
@johannesEOSA1

The South African economy now resembles the slow-melting Antarctic ice shelves where a sudden instability and crumbling emerge, causing a dramatic cave-in of these buttresses and an inevitable and unrelenting acceleration of glacial flows into the sea. It is as if the long period years of economic melting caused by poor policies, public service inefficiencies and rampant corruption have brought the country to an irreversible tipping point.

The Helmond Glacier in Greenland

There are signals of a sudden surge in movement in the destabilisation of trust and hope in a better future.  This has already triggered an acceleration in the erosion of both the country’s productive knowledge and its capital base.  

Fund managers of local financial service providers told EOSA of a substantial increase in local investors exiting local equities and investment instruments, shifting their investments off-shore.

And wealth managers of European banks who have escaped the January northern winters to visit their South African clientele, remarked that in almost every meeting with clients they were asked whether they do not know of someone in Europe who may be interested in a South African golf estate villa, seaside mansions or Lowveld game farm. They do not easily get interest from South Africans to invest in real estate here.

“We are open for business” is an irritating toddler tune

Continue reading “The economy at an irreversible tipping point, caving in like the Antarctic ice shelf?”

30 years on: Is Ramaphosa preparing his version of FW’s “to-the-dustbin-with-ideology” speech?

Johannes Wessels
@johannesEOSA1

Thirty years ago (on New Year’s Eve 1989), FW de Klerk knew that the South Africa was on the verge of massive change. The combined debilitating effects of apartheid’s shackles on the economy (including sanctions) and the impossibility to continue with the disenfranchisement of the majority of the population, prompted him to prepare his watershed 2 February 1990 speech in which he effectively pulled the plug on apartheid.

Will the combined negative legacy of the transformational drag on the economy and the implosion of state-owned enterprises (SOEs) prompt Ramaphosa to discard the ANC’s ideological stance in 2020? 

Continue reading “30 years on: Is Ramaphosa preparing his version of FW’s “to-the-dustbin-with-ideology” speech?”

Betting on the “good ANC guys”: Building sand castles in an hourglass

Johannes Wessels
@johannesEOSA1

The perception of numerous commentators and business leaders that South Africans should mobilise behind president Cyril Ramaphosa, Pravin Gordhan and Tito Mboweni to support the “good guys” in the ANC to ensure an economic recovery, is not only simplistic: it is utterly naive.

It is also not new. It is a rehash of the theme of the 1970s when the National Party was assessed as comprising good guys (the verligtes) and bad guys (the verkramptes) with many commentators arguing the case to support the verligtes. The person who eventually took the quantum leap with a definite break with apartheid (F W de Klerk) was not counted amongst the verligtes. He was seen as rather conservative and a natural choice to chair the Ministerial Council for White “Own Affairs”.

Verlig-verkramp focused primarily on how Nationalist MPs were oriented on apartheid. That analysis had no eyes for another fundamental division: The PW Botha approach with the security structures of the military and national intelligence as key players versus those who preferred a civil-oriented approach with parliament in the fulcrum. De Klerk belonged to the latter faction. Botha and the securocrats had commenced talks and interaction with both Nelson Mandela (then in Pollsmoor) and the ANC in exile, but De Klerk was largely uninformed and excluded from these discussions.

Playing whilst the resource base is shrinking…

Verlig-verkramp was an insufficient perspective to detect the person who would make the decisive break with apartheid.

Now, many commentators and business leaders still cling to the hope for action and clear policy direction, contrary to what is happening in reality. The hope that “Ramaphosa knows what is required” is based on viewing the ANC as comprising a “good ANC” and a “bad ANC” and that the good guys will restore the country to a golden growth path. Treasury’s document on economic policy is clung to as a lifebuoy.

The good guys are supposedly led by Ramaphosa, Mboweni, Pravin Gordhan and Gwede Mantashe, with the bad guys represented by Ace Magashule, Faith Muthambi, Supra Mahumapelo and others.

This cowboys-and-crooks-perspective is naïve. It also fails on at least four grounds. 

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