STUART THEOBALD: SA is ill-equipped to put economy on a war footing

Posted in: i-Blog, SA Equities, South Africa, Sovereign risk on March 23, 2020


This column was first published in Business Day

This is war. There is a health front, but also an economic front. Saving the economy will require wartime thinking.

Start by considering the radical steps other countries are taking.

The UK government last week announced that all workers whose jobs are made redundant because of the Covid-19 pandemic will be paid 80% of their salaries by the government up to £2,500 a month (R50,000).

Businesses and the self-employed have been given a six-month extension on paying income taxes to January 2021 and three-month VAT holiday. The government and Bank of England have created a loan scheme allowing the central bank to lend directly to large companies that face liquidity strain while bank loans to small companies will be 80% guaranteed by the government.

The government has put up £20bn of grants to cover rent and business rates that companies cannot afford. The Financial Times believes the direct costs will be £43bn assuming only 1-million workers end up on the salary support scheme.

Add in the loss of tax revenue from a recession and the UK budget looks set to require an additional £100bn of funding this year, equivalent to 2% of GDP, because of Covid-19. And that is before any direct bailouts of companies including the possibility of direct investments in airlines and other firms that are facing collapse.

The Bank of England will be effectively printing money to support the loan schemes and other liquidity measures it is taking, after cutting interest rates to 0.1%, the lowest level.

That is what economic warfare against the economic impact of the virus looks like. The UK’s measures are the furthest yet by a developed country, but those by Italy and Spain are similar in scope and ambition, while the US is preparing wide-ranging interventions too.

The resulting budget deficits are likely to be bigger than those experienced during the financial crisis, approaching levels not seen since World War 2.

In SA, however, the response has been tepid.

The Reserve Bank’s 100 basis points interest rate cut last week was substantial, but the press release with it was surprisingly “business as usual”.

There was no “do whatever it takes” rhetoric that authorities elsewhere have offered the market. Oddly, the Bank waited until the next day to announce new liquidity support for the financial markets, an announcement that could have been made together with the rate cut to show it means business.

Over at the government, there have been talks about talks, but no real solutions delivered. The president was due to speak as this column was going to press, after meetings with business, but expectations of sweeping government-led interventions such as tax payment holidays or loan guarantee schemes were low.

Of course, warfare is hard when SA’s arsenal is empty. After years of low growth, government debt levels are already at record highs]. The economy was already in crisis with growing unemployment and companies struggling. SA does not have the luxury of the low interest rates of the US and Europe.

Indeed, the crisis has already forced government bond yields higher and risks are rising that its already higher-than-usual fundraising requirements will not be met by the market.

There are certainly some pots of money that can help. The state’s R5bn contingency reserve will barely scratch the surface, but the R150bn surplus in the Unemployment Insurance Fund is an obvious opportunity to mitigate some of the employment effects. A further R35bn of emergency spending could be accessed if a state of emergency were declared.

The Reserve Bank can use its liquidity windows to further support the financial system. Banks could be supported with a special rate window (repo less 100 basis points, say) specifically for Covid-19 liquidity they could use to provide forbearance to clients in trouble because of the epidemic.

Standard Bank said it would provide a payment holiday for certain categories of clients including students and small business. It is the first bank to do so. However, it is administratively complex for banks to provide relief to clients.

Accounting rules require banks to raise provisions if clients fall behind, but there is some wiggle room for clients who are granted forbearance before they miss any payments (so, actually, getting ahead of client defaults with forbearance is wise).

Otherwise, banks must find a way to get clients into new loan agreements with more relaxed terms, a huge administrative burden. Regulators need to work with banks to temporarily relax accounting rules, so they don’t have to raise provisions for Covid-related forbearance.

Regulations in terms of the National Credit Act may also need to be relaxed so that banks don’t have to apply the usual affordability assessments in rescheduling loans. Getting this right would require co-ordination between the Reserve Bank, the Treasury and the department of trade & industry.

That, however, seems like something a war footing should already have achieved.

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