COVID-19 : South Africa, an Economy on its knees - Dr. Paula Armstrong - FTI ...
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COVID-19 : South Africa, an Economy
on its knees
Dr. Paula Armstrong
June 2020Economic restrictions have kept large employment sectors closed
Contribution to GDP (%) Contribution to employment The restrictions on economic activity implemented
(%) with the nationwide lockdown imposed on 27 March
Manufacturing 11.1% 7.4% had a significant impact on different sectors of the
Wholesale and retail 7.9% 10.8% economy.
Agriculture and food services 7.6% 4.4%
Mining 6.9% 7.0% The risk-adjusted strategy to re-opening the economy,
Transport 6.2% 4.6% published by the National Department of Health on 26 April
Financial intermediation 5.5% 6.9% 2020 shows the contribution of various sectors to GDP and
Construction 5.0% 3.1%
employment. The sectors with the highest contribution in
Professional services 4.9% 5.6%
Real estate
terms of both GDP and employment are manufacturing, and
4.7% 0.8%
Automotive 4.0% 6.1%
wholesale and retail trade. Combined, these sectors contribute
just less than 20% of GDP and employment in the South
Source: National Department of Health, Risk-adjusted strategy for economic activity, 26 April 2020 African economy.
The second business impact survey conducted by Statistics
South Africa between the 14th and 30th of April 2020 indicated
that by the second half of April, approximately 45% of
Trading status of businesses, 14 – 30 April 2020 manufacturing businesses and 65% of retail and wholesale
Agriculture 54.2% 11.6% trade businesses were either temporarily closed or had ceased
Mining and quarrying 22.2%
trading permanently. Other sectors that have been particularly
hard hit by the economic restrictions imposed during alert
Manufacturing 38.4% 6.1%
Level 5 and Level 4 of South Africa’s public health response to
Electricity, gas, water supply 43.6%
COVID-19 include agriculture and construction. These sectors
Construction 67.3% 13.7% contribute respectively 4.4% and 3.1% to overall employment
Trade 59.9% 5.9% in South Africa. By the second half of April, more than 65% of
Transport, storage, comms 24.4% 8.9% businesses in the agriculture sector and more than 80% of
Real estate 24.8% businesses in the construction sector were not trading.
Community, social, personal services 47.0% 12.0% Importantly, all of these sectors contribute towards
Total 47.9% 8.6% employment for low skilled workers. These are relatively low
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
paid workers who form part of the “working poor”. Loss of
employment or decreased wages have significant
Trading at full capacity Partially trading Temporarily paused/closed trading Ceased trading permanently
consequences for this part of the labour force, and leave them
2
Source: StatsSA second business impact survey, May 2020 particularly vulnerable to poverty.Small businesses are disproportionately affected by restrictions
Small businesses are particularly Small businesses are also important
hard hit the restrictions placed on employers in the economy. A
economic activity during lockdown significant proportion of workers are Change in number of transactions, Y-o-
and alert level 4. SMMEs simply do employed in small enterprises. More 80% Y
not have the cash reserves to than 40% of employees in the retail
withstand protracted lockdown and and wholesale (trade sector) work in 60%
68%
Change in number of transactions (%)
periods of no revenue. Research
54%
enterprises of less than 20 people. 40%
based on small businesses in the US Similar proportions of workers in the
20%
28%
show that the median number of construction and community and
cash buffer days for small social work sectors are employed in
0%
-30%
businesses is 27. Cash buffer days
-8%
small firms. The impact of COVID-19 -20%
-14%
-17%
are the number of days of cash for employment in small businesses -40%
outflows that a business is able to overall employment in South Africa
pay without any cash inflows. While will be profound. -60%
-84%
-84%
-85%
-88%
-90%
27 days is the median for small -80%
businesses, this is shorter for
-100%
businesses such as restaurants (16 Self isolation: 16 - 23 Lockdown announced: Lockdown week 1: 27 Lockdown week 2: 3 - 8
days), retailers (19 days), and March 24 - 26 March March - 2 April April
construction businesses (20 days). Food, drink and Hospitality Healthcare, beauty and fitness Retail
This creates significant pressure for
Source: Yoco, 2020
SMMEs. Enterprise size by sector, formal and informal (2019Q4)
Business/financial services 27.8% 7.5% 20.8% 43.9%
Trade 41.8% 6.8% 25.0% 26.4%
Community and social work 42.2% 9.9% 19.1% 28.8%
Construction 38.3% 9.2% 23.3% 29.2%
Logistics 28.5% 10.4% 16.7% 44.4%
Manufacturing 17.3% 18.1% 62.5%
Agriculture 24.8% 20.8% 51.4%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
3
0 to 19 workers: waged 0 to 19 workers: owners 20 to 49 workers 50 or more workers
Source: Statistics South Africa Quarterly Labour Force Survey, 2019Q4Macroeconomic impact of COVID exacerbated by tax revenue shortfall
The long term health of the South African
Assuming no reduction in revenue Loss of income by expenditure percentiles
economy looks precarious. Estimates of the
collection, fiscal debt is expected to
size of the contraction in GDP in 2020 range 10 20 30 40 50 60 70 80 90 100
increase to more than 13% of GDP as a
from -5.8% (IMF) to -9.5% (Bureau of
result of a 6% contraction in GDP.
Economic Research). This is a blow to South
Annual growth in income (%)
SARS Commissioner Edward Kieswetter
Africa’s flailing economy and will have Expenditure percentiles
indicated in May that “whilst it is early
significant ramifications both for income of
days, our initial view is that revenue
people living and working South Africa, and
performance will be lower than the
for the deployment of fiscal resources.
February [2020] Budget announcement
Households will become increasingly cash-
by between 15% - 20%”. According to
strapped in a brutal economic climate, which
DPRU estimates, assuming a 6%
may erode tax compliance, even in instances
contraction in GDP, this may increase
where tax relief has been granted.
fiscal debt to around 20% of GDP. This
South Africa’s fiscal debt currently stands at means that an increasing proportion of
around 6.83% of GDP. The Development Policy dwindling tax revenue will need to be
Research Unit (DPRU) at the University of allocated to interest payment, leaving
Source: Sulla et al. (April 2020). World Bank
Cape estimates the impact on fiscal debt fewer resources available to be directed
under different levels of shortfall in tax towards social and economic priorities.
revenue collection, assuming a 6% contraction
in GDP. The prospect of rebuilding in a country
where more than half of the population lives
Fiscal debt as a proportion of GDP, by tax revenue shortfall*
below the poverty line is overwhelming at
Current public debt 6.83%
the best of times. In the face of a global
No reduction in revenue collection 13.49% health pandemic, South African economy
5% reduction in revenue collection 15.91% faces a mammoth task of rebuilding and
10% reduction in revenue collection 17.46% ensuring that structural change remains
15% reduction in revenue collection 19.01% viable in an economy which is already on its
20% reduction in revenue collection
knees.
20.56%
30% reduction in revenue collection 23.66%
40% reduction in revenue collection 26.77%
0% 5% 10% 15% 20% 25% 30% 4
Proportion of GDP (%)
Source: Bhorat et al. (2020); *Assumes contraction in GDP of 6%Experts with Impact ™ Dr Paula Armstrong Director- Economic and Financial Consulting paula.armstrong@fticonsulting.com The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals. FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. For more information, visit www.fticonsulting.com and connect with us on Twitter (@FTIConsulting), Facebook and LinkedIn.www.fticonsulting.com.©2020 FTI Consulting, Inc. All rights reserved.
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