Month: March 2020

The Corona virus is much more than a health crisis

Nobody knows with any degree of confidence how long the economic disruption caused by the responses to the Corona virus will last. And just how much output and income and wealth (savings) will have been sacrificed.

The survival of any business that services crowds of people is gravely threatened as the Chinese lock-down approach to limit infections is widely adopted.  Collateral damage to those enterprises and the large number of self-employed who depend upon opportunities to earn income generated by airlines and airports, cruise ships, hotels, shops, restaurants, theatres, conference, sporting events and their like, even retailers, will be considerable. Including damage to the banks and others who provide them with credit. The margin of safety for many businesses and the self-employed is always very narrow. They will need financial reserves as well as assistance from governments to survive the turmoil.

Perhaps as much of 10% of one year’s global incomes and output will be sacrificed to contain the virus. This is an enormous sacrifice that is being made to overcome a virus that we are informed is not that morbid and comes with limited mortality risk. Currently 180,000 people around the world have been infected. Many have now recovered. The number of victims will surely rise – perhaps treble – before the tide turns if the Chinese evidence is relevant.

What we will never know with any certainty is how many infections and deaths will have been avoided as a result of the shutdowns. Some heartless economist will no doubt attempt to calculate the cost in GDP sacrificed for each death avoided- as well as the present value of the lives saved in the form of future earnings -the narrow economic benefit of saving – mostly old lives. It will be a very large number.

It is obvious that any such cost-benefit analysis has not informed policy in any way. Admirably only potential benefits, numbers of lives saved, have driven the responses made. And taking the pressure off health systems that would otherwise have been overwhelmed by the number of supplicants has been the means to the end of saving more lives. Perhaps when the dust is settled the issue of how to develop a health system capable of responding to an emergency of this kind will be addressed – as a more effective solution than putting people off work.

It is a however a generous response that only a relatively well-endowed society with a large reserve of spending power could possibly make. Without such a reserve to provide relief to those unable to earn any income would suffer terribly for want of life’s essentials. And using the reserve to keep businesses and banks afloat so that they can fight another day also makes good economic sense.

The government spending and financial taps are therefore being opened wide- wider than ever. Central banks are not only creating money to buy government bonds they are also buying shares in businesses and securities issued by them. And are offering loans on generous terms not only to banks but directly to businesses. Taxes are being relieved and postponed and access to unemployment benefits widened. Aid to businesses, for example airlines, will be provided on a large scale. The extra spending so facilitated will reduce the loss of output. It will help pay for itself.

South Africa and too many South Africans have little by way of reserves against economic disasters. Our fiscal space is highly constrained as our Budget proposals have made clear. And raising debt to fund extra spending has become even more expensive for SA after the crisis. Yet monetary policy in SA has lots of room to help our economy. There is room for the Reserve Bank to cut interest rates significantly and to offer financial support for banks and businesses. Our frail economy will need all the help it can get. Let us hope that the Reserve Bank can think – must think and act- beyond the narrow inflation fighting box it has hitherto confined itself.

Appraising the Budget- will the economic future be much better than the past?

The 2020 Budget tax and expenditure proposals are steps in the right direction for the SA economy. Holding the line on real government spending and avoiding a growth defeating increase in tax rates, is part of the right mix of policies.

The SA economy is hostage to fortune as well as to its economic policy proposals. Market reaction to the Corona virus overtook the Budget proposals that were initially well received in the market place.  RSA 10 year bond yields were 8.76% p.a the day before the Budget on the 26th February and 60bp lower immediately on the Budget news. They were up to 9.1% on the 2nd March. They then declined to 8.76% on March 4th after the Fed in a Corona pre-empt, cut its benchmark rate by 50bp and US 10y Treasury Bond yields went below 1%

RSA bonds are not a safe-haven asset for investors inside and outside the country as are US Treasuries and the dollar itself.  Yet were SA to be convincingly judged to be avoiding the debt trap and its money creation and inflationary dangers, taxpayers will gradually be rewarded with lower interest rates and interest expenses on their RSA debts. Global events that are now adversely affecting all EM borrowers and their currencies notwithstanding

The continued failures of the SA economy are elaborated upon in full grim even pious detail in the Budget Review.  Some Treasury mea-culpa would however be entirely appropriate for what has gone so badly wrong on the Treasury watch. Most egregious was the failure to recognize and contain operating costs at Eskom. And earlier to have permitted the explosion of public sector employment benefits in the boom years after 2005. We could have done with a Sovereign Wealth Fund then, reinforced by successful BEE partnerships with it.

The Budget Review contains a broad reform agenda. Including most helpfully bringing the employment benefits of government employees back in line with  “ .. the rest of the economy….” and promises legislation to “…eliminate excessive salaries and bonuses being awarded to executives and managers…” in the public sector that are indefensible. Eliminating the state’s “… complex and often ineffective procurement system. ….” is a reform long overdue.  And the intended reform of the exchange control system to best OECD practice is especially welcome for the wealth friendly signals it emits. Undertaking the “…urgent regulatory reforms of the Ports …”  would be a good step. But not only corporatizing the ports and cutting them loose from Transnet but allowing  them to compete with each other for custom would be much better for the economy.

Staying well out, as intended, of the “….exports of intellectual property..” will greatly encourage the creation of IP. To  “ Reduce the corporate tax rate”  in line with the competition and eliminating many of the complex tax allowances is essential. It is these complications that are responsible for “…South Africa’s tax incentive system…”  that “…favours incumbents and those able to afford specialist tax advice…”

Eliminating the extraordinarily large R600b liability for Third Party accidents of the Road Accident Fund (RAF) as was alluded to in the Budget Speech, would improve the State balance sheet. R2 per liter paid at the pump for the RAF could then be saved by households and businesses. Private insurance companies are more than capable of offering compulsory third-party cover at competitively determined rates. And capable of effectively contesting damage claims in court.

A debt for equity swap with Eskom debt holders is essential to the purpose of making it financially viable- otherwise a further R112b will  be coming its way, on top of the R62b provided to date. And with no guarantees that operating results will improve.

Debt swaps on agreed terms that introduced influential private shareholders to help govern the company will make Eskom economically viable. It would reward its managers conditional on improvements in return on capital. And pay them well enough – which is the usual private sector method for adding economic value.

Wallowing in despair at the highly unsatisfactory economic condition of SA is not helpful. Past failures can be seen as providing much scope for improvement. Hopefully the Budget proposals can provide an upside surprise for the SA economy.