Risk Alert

The shrinking tax base and growing public expenditure heightens the possibility of the country falling into a debt trap, he says.

Dr Cronje also assesses the validity of the ‘Second Wave’ thesis and the consequences for the global economy.

On the international front, Dr Cronje assesses the purported ‘second wave’ of Covid-19 infections in the US and Europe, as well as the ongoing tit-for-tat posturing between the US and China.

Government plans to introduce a basic income grant to offset the social and economic impact of the lockdown will put even more pressure on the already strained fiscus. Government may make a move on private pensions to finance the grant programme, he argues.

Although the global economy appears to be bouncing back after Covid-19, Dr Cronje highlights four risks which may derail this recovery.

With manufacturing and trade volumes increasing across the developed world, we see the likelihood of South Africa de-coupling from the post-Covid-19 global recovery continuing to grow.

As GDP declined by 2% in Q1 2020, South Africa’s recession continued for the third consecutive quarter under President Cyril Ramaphosa. Further contractions of over 30% are expected in Q2 as a consequence of the government-imposed Lockdown.

This comes amidst signs of a robust post-Covid-19 global recovery driven by gradual re-opening in the developed world.

Capacity shortfalls at Eskom and a limited appetite for structural reform will put a hard cap on economic growth prospects going forward, he says.

On the international front, Dr Cronje discusses recent clashes on the border between China and India, as well as simmering tensions between North and South Korea.

Mahlobo also discusses the prospects for reform in South Africa’s electoral system, as well as recent polling which suggests high demand for deregulation of the labour market.

Internationally, Dr Cronje highlights how markets and employment numbers in the developed world are beginning to rebound despite enormous global geostrategic volatility.

On the international front, Dr Cronje notes that R remains below 1 for much of Europe, America, and Asia, signalling the early stages of a global recovery.

Beyond Covid-19, Dr Cronje highlights the restrictions on Hong Kong’s autonomy by Beijing, as well as growing Russian influence in Libya.

CRA calculations reveal that South Africa’s R rate remains above 1, suggesting that the pandemic is still expanding exponentially more than 60 days after the country recorded its 100th case.

Globally, Dr Cronje observes that the continued posturing between the USA and China will be tempered by both nations’ interdependent trade relationship.

Expect a stuttering economic re-opening in Europe and the UK if Covid-19 reproductive rates remain below 1.

Domestically, Dr Cronje highlights the recent statements made by President Ramaphosa in favour of “Radical Economic Transformation”  as well as the isolation of the Finance Minister within the cabinet.

Mahlobo notes that the reform faction of the ANC remains a minority, with the securocrats and ideologues controlling the balance of power.

Internationally, Mahlobo highlights the risk of South Africa’s foreign policy stances undermining longer term access to western funding.

Mahlobo notes that the weakness of South Africa’s stimulus position, combined with the flaws in the new lockdown model could see a major crisis in which public confidence in the government collapses just as the South African infection curve escalates and millions of people are forced to come to terms with deepening impoverishment.

On South Africa, Dr Cronje discusses the growing likelihood of increased stimulus spending and highlights the prospect of money-printing as a medium-term risk.

Dr Cronje also reflects on the risks attendant to a premature re-opening of South Africa’s schools, which, he argues, would undermine much of the effect of the lockdown to date.

Dr Cronje also provides projections of Covid-19 mortality estimates based on various case fatality rates (from 0.5% on the lower end to 2% on the top end). He argues that without much improved levels of testing, analysts and policy makers alike are effectively driving blind in their response to the pandemic.

While there may be relative upsides beginning to emerge internationally, Dr Cronje’s assessment of South Africa’s recovery prospects are more downbeat as isolation protocols falter and the economic impact of the lockdown begin to be felt.

Dr Cronje also looks beyond the current crisis to assess SA’s economic outlook post-Covid-19. Last week’s Moody’s downgrade will hinder recovery efforts, and will likely result in further ZAR weakening.

Dr Cronje also discusses the volatility in international financial markets, the efficacy of stimulus measures, as well as prospects for the domestic and global economy in 2020.

On the domestic front, Dr Cronje assesses the Finance Minister's prospects of reducing the public sector wage bill. Dr Cronje also highlights the risk of prescribed assets and the growing pressure on the SARB to loosen interest rates.

For queries on these or other points, please contact Bheki Mahlobo, who assisted Dr Cronje with the production of this alert.

International factors include a dramatic slowdown in GDP growth in Japan, and the latest forward guidance by the US Federal Reserve, which indicated that it remains opposed to further rate cuts.

Two international bodies also made pronouncements on SA last week: Moody’s cut SA’s growth outlook from 1.5% to 0.7%; and the IMF, whose chief economist visited the country, dismissed the likelihood of a bailout for SA.

On the domestic political front, Dr Cronje discusses the origins of the Employment Equity Amendment Bill of 2020 and its likely impact.

Dr Frans Cronje argues that last week’s State of the Nation Address (SONA) failed to put forward a coherent plan to deal with SA’s deep economic problems. 

Two such problems include SA’s stubbornly high unemployment and lower manufacturing production output, both of which are discussed here in some detail.

The proposed break-up of Eskom into multiple parts has been welcomed by many commentators. However, this could precipitate a second wave of state capture.

The global Coronavirus outbreak presents a contagion risk for SA and is something to watch closely.