We will need more than rate cuts to survive

2020-03-22 14:50

South Africa has not been spared the global equity market bloodbath, growth revisions and threats to the health of the economy as a result of the outbreak of the Covid-19 coronavirus.

In fact, being such a small economy, and one that is struggling to boost growth and employment anyway, we are more vulnerable to external price shocks. Trillions of rands in value has been wiped off the stock exchange, and the rand has plunged by 17% against the dollar. The picture is dire.

Our economy is in trouble and we will just have to bite the bullet. There is not much else to be done.

The governor of the SA Reserve Bank, Lesetja Kganyago, on Thursday announced that the bank was reducing the repo rate by a full 100 basis points to alleviate the short-term fallout from the Covid-19 pandemic. The cut was larger than many economists expected and smaller than some wanted.

To rub salt in the economic wound, the country’s growth outlook has been revised downwards. If it was decidedly anaemic beforehand – just 0.9% – it is positively bleak now, and projected to contract by 0.2%.

Even though the inflationary outlook looks muted and is not expected to rise beyond 4.4%, this does not create jobs or spur investment.

Read: SA in a recession for the third time since 1994

As many governments around the world are rapidly putting fiscal stimulus measures in place, South Africa just does not have the money available to respond in a more meaningful way. The Reserve Bank has announced measures to ensure liquidity in the market, but it mostly only plays to banks.

The rate cut will offer some relief to consumers whose backs are against the wall, but will do little to counter the potentially devastating effects of social distancing on smaller businesses as curfews on drinking, limitations of patrons in restaurants and other myriad consequences of isolation to stop the pandemic from spreading in South Africa come into effect.

Our economy is in trouble and we will just have to bite the bullet.

There is not much else to be done.

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March 29 2020