South Africa

South Africa Special April 2020

South Africa: Government unveils stimulus to contain the impact of Covid-19 amid a dire fiscal outlook

On 21 April, President Cyril Ramaphosa announced measures to combat the economic impact of the Covid-19 pandemic totaling ZAR 500 billion (about 10% of GDP), which aim to support businesses, retain employment and shield those most affected by the crisis. Despite the large headline figure, additional fiscal spending will only amount to around ZAR 170 billion, with up to ZAR 130 billion coming from budget reallocations and ZAR 200 billion representing government loan guarantees. The president clarified that a part of the additional funding needed will be funneled from the Unemployment Insurance Fund (UIF), while the rest is likely to come from multilateral institutions. Some senior officials are reluctant to seek a deal with the IMF, wary of the structural adjustments that a loan would entail; however, following the president’s speech, the Fund remarked that South Africa is entitled to as much as USD 4.2 billion in emergency funding with no such conditions.

The ongoing health crisis has flustered government efforts to reduce the fiscal burden and will likely exacerbate the country’s structural imbalances at a time when funding is becoming increasingly less accessible. Moody’s decision to downgrade the South Africa’s last investment-grade rating on 27 March, coupled with Fitch Ratings’ decision to downgrade the country further down the junk scale on 4 April, further depressed investor confidence and prompted a sharp sell-off of the rand. Although emergency funding from international lenders such as the IMF may help the country overcome the worst of the pandemic in the short-term, the dire conditions of state-owned enterprises such as Eskom will continue draining the public accounts in the medium- to long-term. As a result, risks to debt sustainability loom large ahead and will likely exacerbate in the absence of structural reforms.

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