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How do we save SA?

- Lumkile Mondi

The virus has wiped billions from stock exchanges globally. Now is the time to re-evaluate and promote domestic private investment.

The president of the Republic of South Africa rose above expectations when presenting South Africa’s response to the Covid-19 coronavirus crisis. His announcement on Sunday followed panic and mass selling of shares in stock exchanges across the world, including the JSE, which lost 15% of its value.

The past week was no different, with the JSE’s all share index down by 12% at one point during the day on Monday – more than its record fall of 11.7% in 1987. However, it rebounded later, ending the day 8.3% lower. In the process, it left many who have unit trusts, exchange-traded funds and retirement products with different asset managers poorer than they were at the beginning of the month.

Because there is no way to tell when Covid-19 will be conquered, the impact of the virus on South Africa’s economy remains uncertain, so selling may not be a bad option. However, it is critical in uncertain periods to keep calm, and that is what President Cyril Ramaphosa tried to do on Sunday by reassuring all South Africans that we can defeat Covid–19 by working together.

It requires a lifestyle change from individuals and different business models, as well as the maximisation of technology. However, as the president announced the locking down of South Africa and the revocation of visas for tourists from Europe, Asia and the US, so the hospitality, tourism and aviation sectors began to shut down. Because of their labour intensity and export earning capabilities, both employment and South Africa’s balance of payments will most likely be negatively affected.

Beyond the president’s response, other stakeholders were expected to present the ways they will put South Africans’ lives before profit – a difficult ask for a country that is deeply divided because of its past and the rise of populism. The difficult tasks range from the introduction of the National Health Insurance scheme to the expropriation of land without compensation.

It has taken Covid-19 and the possible loss of life for Ramaphosa to focus on putting South Africa first, and his call has galvanised all sectors of our society to again believe in the rainbow nation and that we are stronger together.

This allows us to think outside of the box and focus on jobs, industrialisation and the eradication of inequality. I believe this is how we can lessen the impact of Covid-19 on South Africans.

First, lowering interest rates can stimulate productive investment. The governor of the SA Reserve Bank this week announced a 100 basis point cut in interest rates, which would come into effect on Friday. The effect of the cut in interest rates may be modest given that some economists were asking for between 150 and 500 basis points, but there is still an important advantage to lowering interest rates as a policy intervention.

At least the direction of effect is certain and there is no difficulty in terms of establishing the time sequence between the policy intervention (monetary or credit allocation policies to lower interest rates) and the intended effect (making cheaper credit available to private investors).

Households will also be cushioned by the tax relief announced during the budget speech last month. Combined with the basis point cut, many more people will now be able to survive the difficult period ahead. However, those who are unemployed (29.5% of the population), will only benefit if cheap credit leads to more borrowing for investments by the private sector, which would result in job creation. However, this scenario is unlikely in this environment.

Second, government deficit spending can promote GDP growth to some extent, especially if the spending associated with the rise in government borrowing is targeted at increasing public investment and at sustaining small, micro and medium-sized enterprises in the form of financial support.

Income protection could alleviate hardship during self-isolation, particularly for businesses that provide services, including restaurants and entertainment venues. However, excessive reliance on government borrowing can be counterproductive due to the high level of debt to GDP and malfeasance, so this might not be plausible.

Third, stabilising exchange rates and the financial markets can contribute to promoting domestic private investment. The policy mechanisms to achieve these outcomes would involve capital controls for the exchange rate and financial markets, as well as financial market regulations to promote stability. The rand has lost substantial value in the past few weeks in line with many commodity currencies.

What is surprising is that, despite the quantitative easing by the European Central Bank and the Federal Reserve, there have been no capital inflows into emerging markets, indicating that Covid-19 is seeing to it that money stays at home.

This presents a huge opportunity to introduce capital controls to discourage capital outflows and redirect investment away from the JSE directly to productive firms, thereby strengthening our productive industrial base for the production of domestic goods to satisfy domestic demand and create jobs.

This will most likely be opposed by different ideological interest groups. However, times are different and, just like Ramaphosa’s bold initiative regarding fighting poverty, South Africa should use all available instruments to grow an inclusive and dynamic economy. 

It can be done if we direct all our domestic resources to production rather than financial instruments that enrich those who are employed, leading to worsened inequality and poverty.

Increased social stability should also promote domestic and foreign investment. But improving social stability will itself come through a broader programme of increasing employment opportunities and the social inclusion of the poor. Efforts to reduce unit labour costs through wage cutting will, by contrast, provoke social unrest and thereby discourage investment.

Lumkile Mondi is a Senior Lecturer at the School of Economics and Finance at Wits University. This article was first published in City Press.