COVID-19: Tough times ahead for SA economy
19 March 2020
Examples of COVID-19’s shorter-term economic consequences include falling demand for airline and tourism services, disruptions to supply chains and global food systems. South Africa’s economic challenges include amongst others, high and rising levels of government debt, electricity supply constraints and high unemployment. COVID-19 can intensify an economic slowdown amidst a fragile economic outlook.
A slowdown in economic activity will add additional pressure to the government budget deficit, lower tax revenues and struggling State-Owned Enterprises (SOEs). A further economic slowdown will reduce electricity consumption and Eskom’s tariff revenue.
Following the example of recent global experiences, the government’s concerted efforts to contain and mitigate the risks posed by COVID-19 should be welcomed. Whilst these measures may have short- to medium-term economic implications, the cost of not acting would have far greater longer-term negative consequences.
The South African Reserve Bank (SARB) announced a decision to cut the repo rate by 100 basis points. The repo rate will now be 5.25% per annum, with effect from 20 March 2020. Whilst inflation expectations were a key consideration, the broader economic environment along with COVID-19, oil prices and the exchange rate had to be considered by the Monetary Policy Committee (MPC).