Marisa Lourenço, Associate Analyst

The coronavirus disease 2019 (COVID-19) pandemic will have severe economic consequences for South Africa. We consider the impact on fiscal and social stability, and the wider political and policymaking environment.

  • The government’s extraordinary measures to prepare the healthcare sector and protect jobs will necessitate higher public spending and borrowing, exacerbating persistent fiscal difficulties over the coming years.
  • Socioeconomic pressures will likely drive a rise in crime and civil unrest as livelihoods come under pressure from the economic repercussions of government restrictions, and broader domestic and global shocks.
  • Nonetheless, these challenges are unlikely to drive threats to political stability, and President Cyril Ramaphosa will continue to entrench his power within the ruling African National Congress (ANC).
  • The pandemic will not drive a departure from the government’s transformation agenda, which seeks to provide redress for historical injustices, sustaining regulatory uncertainty amid policy discord. 

Extraordinary measures 

The government has implemented two significant measures to combat the fallout from the pandemic:

South Africa’s largest-ever stimulus package: The government in April introduced a ZAR 500bn (USD 26bn) stimulus package intended to strengthen the healthcare response and provide a safety net for vulnerable people and affected small, medium and micro enterprises (SMMEs). ZAR 200bn (USD 7.4bn) will come in the form of loan guarantees. Of the remaining ZAR 300bn (USD 15.9bn) of expenditure and tax relief, ZAR 130bn (USD 6.9bn) will come from the current budget. That leaves ZAR 170bn (USD 9bn) to be covered through borrowing by tapping into the international debt market. The government had been considering options from the IMF, World Bank, BRICS New Development Bank and the African Development Bank. On 8 June, it announced it had accepted a ZAR 70.5bn (USD 4.2bn) loan from the IMF.

One of the strictest lockdowns globally: A nationwide lockdown implemented on 26 March saw most economic activity halted until 31 May. The government has since switched to a five-level risk-adjusted strategy, where restrictions change according to threat level. Level five is lockdown and the most restrictive, while level one allows most activity to resume with additional health and safety measures in place. The government is attempting to slow the rate of infection as it bolsters healthcare capacity for an eventual spike in cases. Level three has been in place since 1 June, with most parts of the economy allowed to reopen but rigorous social distancing requirements in place. Meanwhile, a ban on inbound and provincial travel imposed on 16 March, when the ongoing national state of disaster was declared, continues to be enforced. Restrictions will likely persist in some form for most of the year.

Deepening fiscal challenges

Although the stimulus package will soften the economic fallout, it will not be enough to avoid a deterioration in the country’s fiscal position. South Africa has recorded limited economic expansion for a decade, and the South Africa Reserve Bank (SARB) expects GDP to contract by 7% in 2020, the first full-year contraction since 2009. The retail and hospitality sectors have been particularly hard hit by social distancing measures, while heavy industries like construction, mining and manufacturing have recorded significant productivity losses. These domestic challenges have been compounded by the country’s exposure to global shocks, including the commodities price slump, which has limited export revenue, and the currency (rand – ZAR)’s weakened performance against the US dollar and other major currencies.

Meanwhile, the budget for the April 2020- March 2021 fiscal year, tabled before parliament in February, envisioned a greater commitment to fiscal consolidation, with debt levels going no higher than 71.6% by 2023. This has now become impossible, given that the pandemic fallout will necessitate tapping into the international debt market for around ZAR 170bn (USD 9bn) of its stimulus package. The government will need to increase public spending, particularly for the healthcare sector. According to the Treasury, the total debt burden is now expected to reach 85.6% of total GDP by the end of 2021.

The weakened fiscal position will inevitably place upward pressure on sovereign risks, a longstanding concern. Since March all major ratings agencies have rated South Africa at sub-investment grade amid concerns over the debt load and limited reforms to address structural challenges. However, most of South Africa’s debt is denominated in local currency, insulating it against currency fluctuations and therefore not affecting the amount owed. The government is also able to borrow from international markets at a favourable rate, as indicated by the 1% interest repayment terms of the IMF loan, which will ease the burden of the growing debt load.

Upward pressure on security threats

The pandemic is likely to result in significant job losses, exacerbating the already high unemployment rate, estimated at 28.7% at the end of 2019. The SARB expects anywhere between 690,000 and 1.8m layoffs in 2020. Meanwhile, although the economy is likely to recover from 2021, the SARB predicts real growth of just 3.8%. This does not signal meaningful expansion that could create employment opportunities, but rather increased economic activity compared with the stagnation that characterised the first half of 2020.

These dynamics will place upward pressure on security threats, particularly crime and civil unrest in urban areas. The hard lockdown witnessed sporadic incidents of looting and localised unrest, including in the informal sector (estimated to employ around 18% of the population, or around 1m people). Such incidents have become much less frequent as more parts of the economy have reopened, but are likely to continue over the coming months as restrictions remain in place.

Armed robberies, carjackings and residential break-ins – persistent challenges facing businesses – typically worsen in tandem with increased socioeconomic pressures and are likely to increase in the coming months. Meanwhile, trade unions are likely to lead popular protests against layoffs, while unrest related to xenophobic sentiment will persist, particularly in Gauteng province. Foreign nationals from other African countries have long been a target of violence as they are perceived as taking employment opportunities. Related protests could flare up as jobs become scarcer, posing incidental threats to businesses.

Political stability amid policy discord 

Nonetheless, although the socioeconomic fallout will be significant, we do not expect overall political stability to be threatened. Opposition parties will likely seek to capitalise on criticism of the administration’s handling of the pandemic, particularly as the 2021 local elections approach, but lack the support base to wrest power from the ANC at the polls.

Within the ANC, the balance of power has tilted towards the Ramaphosa-led faction since the pandemic began. Ramaphosa and his allies are more reform-minded, seeking to ease burdens on doing business and commit to fiscal consolidation. The anti-Ramaphosa faction – primarily comprised of allies of former president Jacob Zuma (2009-18) – has tended to oppose such reforms, concerned these could supplant its pro-poor stance. 

In March, Finance Minister Tito Mboweni, a key Ramaphosa ally, stated he preferred not to incur further debt through borrowing from multilateral lenders, but acknowledged the country would need to explore all possible avenues, including the IMF, to cope with the fallout from the pandemic. This prompted criticism from some high-ranking government officials and members of the ruling tripartite alliance – the South African Communist Party and Congress of South African Trade Unions (COSATU) – over concern this could alter the country’s policy direction. Many developing countries have a historical distrust of the IMF, concerned its terms and conditions result in policy interventions. Nonetheless, the government accepted an IMF loan, showing a prioritisation of economic policy over ideology and signalling the increasing power of the more pragmatic Ramaphosa-led faction. This will further underwrite political stability as Ramaphosa entrenches his authority during his current term (2019-24) and a likely second term (2024-29). 

Nonetheless, divisions within the ANC are likely to persist. These typically revolve around land reform, the mandate of the SARB and the process of reforming state-owned institutions, notably power utility Eskom and national carrier South African Airways. Although these divisions do not pose a threat to political stability, this discord will continue to slow policy formation and drive uncertainty regarding the direction of state intervention in investment legislation, particularly in the mining, agriculture and financial services sectors.

Ongoing regulatory uncertainty

Overall, the pandemic is unlikely to alter the direction of the government’s transformation agenda, which seeks to provide redress for historical injustices. Although inflexible labour regulations weigh on the ease of doing business and uncertainty around land reform has resulted in a dip in foreign private investment, these are part of a broader effort to reduce high levels of inequality and important to the majority of the electorate. Although the pandemic will necessitate some economic reform, this will likely manifest in efforts at fiscal consolidation after 2020 rather than a shift in policy direction.

We therefore do not anticipate a relaxation in broad-based black economic empowerment (B-BBEE) requirements in the coming years. In some instances this will drive regulatory risks. For example, debate continues around compliance with the Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry (the “Mining Charter”). The most prominent area of dispute relates to the charter’s requirement that mining companies should be 26% owned by black South Africans. Neither government nor business have shown willingness to make concessions on recognising prior empowerment deals, driving persistent uncertainty.

We also do not expect a shift away from the policy of land expropriation with compensation. The ANC in December 2017 adopted a resolution to pursue this, and has taken several steps to develop the relevant policies. Nonetheless, progress has been slow. We believe the issue is likely to take a back seat over the coming 12-to-18 months as the government focuses on handling the fallout from the pandemic, but will remain a key legislative change. We maintain our view that it will focus on state-owned, fallow and disused land rather than commercially owned and operated property, presenting fewer risks to investors. The government in December 2019 made clear that expropriation would not target land use for commercial purposes. It is unlikely to depart from this position given the negative impact this would have on investment flows, now an even greater concern amid the fallout from the pandemic. 

Monthly Briefing

Receive our analysis and insights straight to your inbox every month


You may also be interested in

Get in touch

Can our experts help you?