Policymakers globally accept the need for sufficient isolation to slow the spread so that medical capacities are not overwhelmed 23 MARCH 2020

For SA to meet its sovereign debt obligations fully elected leaders would have to take reckless chances and then get very lucky. To manage the Covid-19 crisis and its aftermath prudently, the challenges must be framed objectively, the trade-offs clearly identified, and the underlying opportunities seized.

More information is always desirable, yet delayed response would be reckless. Enough is known to grasp the range of possibilities and assign reasonable probabilities. Least-awful scenarios are less likely than those accompanied by devastating human and economic consequences.

An existing or new drug will probably prove effective at saving lives, but when? Leading experts — alongside reports from Italy, Iran and elsewhere — discourage hopes for near-term medical remedies. Rather, policymakers elsewhere now accept the need to achieve sufficient isolation to slow the spread such that medical capacities are not overwhelmed. For instance, once demand for ventilators exceeds supply, the death rate can soar.

SA’s population is particularly vulnerable. Weakened immune systems of many younger adults and an already strained public health system heighten risks. Yet the risk factors that can, and must, be confronted urgently relate to mass transportation.

A third of the US’s mass transport users are New Yorkers. With 6% of the US population, that state suddenly accounts for a third of the US’s Covid-19 cases. Social distancing is incompatible with mass transportation.

Restricting border crossings came late. The potential for the 4-million South Africans who commute to work via public transport to spread the virus amounts to an existential threat. The network should be shut down immediately. The economic dislocations will, of course, be truly profound, yet less awful than not acting. Fear of credit market reactions must not deter the bold decision-making required.

Two steps

There are trade-offs between the human and economic tolls but it is critical that they be objectively defined in terms of scenarios.

Two overarching steps must be taken immediately:

• Front-loading the economic costs will save many lives and minimise the total costs.
• Accept that there is no basis to prioritise the interest of bondholders ahead of the lives of South Africans. Rather, their interests align.

Bondholders are better off if SA flattens the curve of the virus’s spread. Yet acting swiftly and appropriately will trigger credit market tripwires.

The governing party’s strategy of creating dependencies on the government has been highly effective politically but it has been strangling economic growth. It has become clear in recent weeks that the ANC is incapable of making the necessary policy pivots and has in fact given up on trying.

Despite widespread corruption allegations, the party’s electoral dominance persisted in May 2019, yet the economic viability of its dependency-driven policy was only destined to expire in the medium term. The coronavirus has shortened that timeframe to now.

Public transportation has to be suspended or severely restricted. If someone is so vital that he or she has to get to work, then Uber-type remedies must be employed. Such alternatives need not be perfect to be highly beneficial.

Decisions must be framed around the primary objective of minimising loss of life. SA’s working population is burdened by high prevalences of HIV and TB. The extent to which this increases coronavirus risks is unclear. But from a scenario-planning perspective it adds to arguments for an extreme response.

Given up

Perhaps it will be necessary to make finance minister Tito Mboweni in effect an economic tsar with broad authority. Nor is it too early to consider how high a daily death count would need to be to trigger a declaration of martial law.

To frame such decisions we should recall where we were. In February the president’s state of the nation address and the finance minister’s budget speech made it clear that the government had given up identifying a high growth path. Instead it was going to try to slow the rate of government expenditure. This path was going nowhere — and then the coronavirus spread viciously.

The IMF’s tool bag is full of financial repression tools to overcome political opposition to necessary structural changes while making creditors come to the table. In SA this will need to happen with sovereign debt investors as well as lenders to consumers and small businesses.

But SA cannot afford to have this crisis inspire only tactical, short-term responses. Instead, this crisis must overcome the political paralysis that was entrenching an expanding majority of South Africans in chronic poverty. An abrupt break from the status quo is required. By way of comparison, last year’s election was largely inconsequential.

SA’s political economy has been captured by making a majority dependent on the government, which has resulted in years of negative growth in per capita income — with no end in sight. Meanwhile, with government borrowing soaring, the fiscal deficit is set to swell. The compounding has long been unsustainable while only getting worse.

Redistribution is easy for a governing party with a clear majority. Conversely, achieving sustained high growth nowadays requires intensive global integration through focusing on competitiveness. Policies focused on redistribution undermine competitiveness and growth.

Prioritising redistribution

Factional battles within the governing party, and with its alliance partners, block necessary policy reforms. The government has shown no stage-setting capacity for grand compromises. Eskom was bailed out and then a futile attempt was mounted to achieve wage concessions.

SA can emerge stronger from this crisis but this requires abandoning delusions that the status quo ante was viable. Policymakers prioritising redistribution ahead of growth was always destined to increase poverty and thus worsen inequality. Such misguided policy-making was then magnified by having many lower and middle-income households relying excessively on very expensive debt. As the Marikana tragedy signalled, once workers have maxed out their access to expensive loans, wages must be increased far in excess of inflation to avoid declines in purchasing power. Such household realities spur union negotiation militancy.  

The civil service wage bill must be constrained. This must be associated with the government working with lenders to reduce consumer borrowing costs. As in other countries, SA’s small business sector will suffer harshly. Short-term aid must accompany improvements in long-term viability.

When investors lend, they assume risks. Debt restructurings have long been part of the global economic landscape. The new leadership at the Public Investment Corporation and the senior decisionmakers at the Treasury should agree that debt restructurings are appropriate given SA’s circumstances. Conversely, raiding pension funds would sacrifice the desperately needed discipline — and forbearance — that astute credit market protocols provide.

With the coronavirus providing the background impetus, sovereign debt creditors will need to sign-off on a broad restructuring of SA’s economy in the next months. Reluctance to accept this threatens to cloud decision-making when urgency and clarity are most needed.