PETER ATTARD MONTALTO: So much need for stimulus, so little room to move

The government has not set aside enough funds for a rainy day, and coronavirus now adds severe external shocks

This column was first published in Business Day

This is why you run a conservative fiscal policy with only moderate debt to GDP. This is why you undertake structural reform swiftly when you have the chance and have a dynamic economy with healthy companies that can adapt to shocks and bounce back quickly.

For years there has been a halfhearted discussion about the fact that the fiscus needed to be consolidated for a rainy day. Looking through all the concerns about misallocated expenditure and revenue buoyancy problems, at a more fundamental level the fiscus has not been where it needs to be for an emerging market that is susceptible to global shocks against the background of exceptionally weak (and weakening) domestic fundamentals.

Coronavirus now adds severe external shocks into the SA economy while the risks from domestic transmission are growing.

All economies are undergoing these shocks but the issue — the truly fundamental problem that Pretoria often does not grasp — is that the real test is how fast you bounce back. The lack of structural reform, the energy policy mess and the ongoing tightening of financial conditions as bank impairments were rising will set SA on the back foot in absolute terms and also with respect to peers when the time comes for the recovery.

SA has no simple avenues for stimulus without risking a sudden shock in this febrile global environment to funding which would result in emergency austerity spending cuts. There is a small amount of R5bn in the contingency reserve for the fiscal year from April, and the Treasury could use section 16 of the Public Finance Management Act (PFMA) to use about R35bn of emergency spending. However, the inefficiencies of spending would mean using this for general economic stimulus would be highly ineffective and it would be punished by markets. Using it for emergency health expenditure to combat coronavirus would be a much better use of the money.

Political choices over business support will be thrown into stark relief as well. SAA will be severely hampered by coronavirus, especially if the government announces various travel bans to slow the spread of the virus. This will necessitate even larger bailouts from the Development Bank of Southern Africa (DBSA) and others to keep the airline’s operations alive. Yet such money would be far better being used from development finance institutions to support jobs in otherwise sustainable businesses in the economy rather than propping up something that was insolvent anyway.

SA is about a month behind Europe in the timeline of the progression of the coronavirus, giving some opportunity to delay progression (flatten the curve as it is called) but also get in place support mechanisms for business, especially small, medium and micro businesses and tourism, which are likely to be particularly hard hit. Given the lack of fiscal space built up in recent years, however, most of this support is likely to be bank forbearance.

The larger worry is that the economy’s underlying structural weaknesses will mean it will fail to bounce back quickly.

As we saw after the global financial crisis, deep job cuts in periods of crisis have long-lasting effects. This process of job losses had already started to accelerate in the past six months anyway but will now be compounded.

We must also keep an eye on the reform process and how this stalls during the coming months as coronavirus spreads.

Part of this stalling will be inevitable as the government is distracted by the health care emergency and its resulting economic fallout. Yet Pretoria also likes deflection excuses for the lack of reform and low growth. Recently the president blamed the global financial crisis over a decade ago for low growth now — ignoring the fact that other countries had easily outperformed SA thanks to more dynamic economies since that period.

Energy policy should be particularly watched if a depression in demand reduces load-shedding in the months ahead and with it any last remnants of urgency to solve the underlying crisis, which will still be there waiting.

The government needs to avoid a “year off” reform just because of coronavirus. Indeed, reform efforts should be sped up to help the economy accelerate out of the coming slump.

What could be better than a mass of energy and infrastructure investment ready to jump-start the economy afterwards? Yet the government still lacks the capacity and desire to be able to take such a view.

A blame game is likely to start alongside the calls for stimulus. The refrain that this was an unknowable black swan event will become common. Yet no-one can say they weren’t warned about the need to undertake fiscal consolidation and structural reform to be ready for the rainy day that has now arrived.

• Attard Montalto is head of capital markets research at Intellidex.