Research - Executive Brief
SSA (R&E) – Macro
Emerging Markets Region Written by
Ong Hai Rou
Nigeria’s Mining Industry:
Associate
Figure 1: Unemployment Rate, GDP % Change, Current Account
0,4
0,05
0,35
0,03
0,3
0,01
0,25
-0,01
0,2
-0,03
0,15
-0,05
0,1
From Bad to Worse, Tough Times Ahead
South Africa has been identified by NKC Africa Economics to
be the economy amongst all emerging countries that will face
the biggest drop in GDP in 2021. The COVID-19 pandemic
has caused huge sufferings in the country with a large
numbers of job losses, collapse in economy, and even
resulting in a crisis of the people’s confidence in their
leadership.
Bad Numbers from all Sectors
-0,07
0,05
0
-0,09
2017
2019
2019
2020
2021
Unemployment Rate (% of Labour Force) (LHS)
GDP (Annual % Change) (RHS)
Current Account (% of GDP) (RHS)
Source: IMF 2020
Figure 2: Gross Debt-to-GDP outlook
1,4
1,2
1
0,8
The industrial sector is responsible for hiring 22.7% of the
workforce and takes up 26%, more than one-fourth of the
country's GDP. However, in the first quarter of 2020, both the
mining and manufacturing sector saw huge decreases in
growth at 21.5% and 8.5% respectively. They are the two
largest negative contributors to GDP growth, at negative 1.7%
points and negative 1.1% points. In addition to the same
quarter, the electricity, gas and water sector also contracted.
Continuing onto Q2 of 2020, South Africa’s economy shrank
by an annualized of 51%, the worst ever contraction since
1960 and is the country’s fourth quarterly contraction in a row.
Agriculture was the only industry that has shown positive
growth, but only contributes to a small part of GDP, at less
than 2% and is only responsible for the employment of 5% of
the workforce. In July, the Reserve Bank has also cut the
year’s GDP forecast to be at around a 7% contraction.
0,6
COVID-19 Worsens the Situation
0,4
0,2
0
2020 Budget
2019 Budget
Source: Deloitte 2020
Headlines
•
It is the fourth quarter that the country’s
GDP has contracted.
•
Mining and Manufacturing industries are
the two largest negative contributors to
GDP growth, adding up to negative
2.8% points.
•
COVID-19 has not been contained well
in the country, and there was rapid
increase in infection rates.
•
Unemployment has reached an all-time
high of more than 30% and could
continue to grow.
•
Moody’s Investor Services has
downgraded South Africa’s soverign
credit rating to sub-investment grade.
•
SMEs are in deep waters due to
lockdown measures and safe distancing
measures.
Contact
Amy Nguyen
Phnguyen.2019@smu.edu.sg
Monday, 12 October 2020
The COVID-19 pandemic that has not been contained well in
South Africa, and there was rapid increase in the infection
rates. The number of confirmed cases accounted for more
than half of all in the continent and the country has the fifthhighest number of reported infections in the world. To control
the rate of infection, the government has ordered a nationwide
stay-at-home lockdown earlier in March which prevented
people from leaving their homes. They were also only allowed
to go to work if and only if they were working in an essential
sector. Non-essential industries were closed down, resulting
in the retrenchment of many workers. The implementation of
the social distancing measures that happened after the
lockdown which ended in May greatly affected the deep
underground mines in South Africa. It limited the ability of
miners to ramp up production.
The contractions in the economy, coupled with the effects of
the lockdown, has brought the total number of unemployed
people to 7 million and South Africa’s unemployment rate is
at an all-time high of more than 30%. (Figure 1) The
unemployment also has a huge impact on the household
consumption directly through the amount of disposable
income that the people hold. There will also be spill effect to
the country’s budget. The unsustainable debt-to-GDP ratios
(Figure 2) were alerted in 2019 during Minister Mboweni’s
Medium-Term Budget Policy Statement. The budget deficit is
expected to grow to 6.8% of the GDP from R243 billion in
2019/20 to R370.5 billion this year. What this means is that
the gross national debt will rise to 65.6%, which is nearly twothirds of the GDP by the end of 2020/21 and will continue to
rise to 71.6% in 2022/23. While this is already frightening
news, the worst has yet to be mentioned. The increase in
unemployment and reduction in economic activity also means
a decrease in the tax collected. This fall in tax revenue will
have a bigger impact on the country’s debt-to-GDP ratio,
which is forecasted to be 81.8% instead of the original 65.6%.
In April this year, Moody’s Investor Services made its final
decision and ultimately downgraded South Africa’s sovereign
credit rating to sub-investment grade.
Engine of the Economy is Facing Strong Headwinds
The critical driver of South Africa’s economy is its SmallMedium Enterprises (SMEs) that represent more than 98
percent of businesses and hires more than half of the
workforce across all sectors. They are also responsible for
around 25% of the jobs created in the private sector. However,
the lockdown measures has inflicted great pain to their
operations and revenues have been depleting so quickly that
most are forced to reduce their business spending and costs
in order to continue. According to a McKinsey Consumer
Pulse Survey done at the end of Q1 2020, more than 80% of
those survey were reportedly looking at reducing spending
across all retail categories. 70% of those surveyed have also
mentioned the largest area of reductions in spending was
through the retrenchment of workers, mainly due to decrease
in revenues and uncertainty for the future. With the current
trend, around 71% of the SMEs signalled that they may have
to close down some parts of business or even close down
completely before the crisis is over. This will be detrimental
and have negative impacts on the government’s efforts in
restoring the economy after the pandemic ends.
Relief Policies are Not Working as a Good Cure
The government has come up with relief packages that would
come in three stages. The first stage that started in mid-March
were measures to help with the immediate impacts of COVID19. The second was to stabilize the economy and the third
stage looks at rebuilding the economy. For the first stage,
there are child support grants to alleviate child hunger, there
was also the set-up of the Unemployment Insurance Fund to
provide wage support and funding was given to support the
health sector. Not only that, the government was also granting
direct funds small businesses. However, reality differs from
expectations, and there were already challenges for the
initiatives in the first stage. The starting of the R40 billion
program to provide monetary support to retrench workers was
a long process, as the Unemployment Insurance Fund had
regulatory and operational problems which had an impact on
its ability to deliver these payments efficiently.
Two years ago, only 6% of the SMEs surveyed received
government funding. Most of the funding especially from the
private sector has been directed to mature businesses
(businesses that are more than 5 years old). The lack of
funding proves to be huge hindrance in the development and
growth. For this year, to tackle the negative effects of COVID19, R6.5 billion has been set aside specifically for small
business inventive programs and about a third of it will be
transferred to the Small Enterprise Development Agency
(SEDA) for loan funding and non-financial support. However,
almost 40% of the SMEs are still not receiving the loans from
the institutions like SEDA. They were either unaware or did
not qualify. Fortunately, a One-Stop platform has been set up
to improve the access for these SMEs to both financial and
non-financial support. In addition, the government is also
continuing to offer Industrial business incentives of R18.5
billion targeting at automotive sectors, black industrialists and
infrastructure grant support.
External Relations with the Continent
Amidst all the challenges faced internally, South Africa’s
foreign policy which is to be Afro-centric will be tested by the
COVID-19. The pandemic is pointing out and aggravating the
already straining the socioeconomic, political and security
conditions across Africa. Due to shutdowns in some of the
major economies and South Africa’s main trading partners, in
comparison to last year April, exports this year has declined
by more than half in March Trading conditions have been
worsened by the pandemic, it is a critical time to expand the
intra-African trade. GDP will be contracting significantly this
year due to declining global demand and local activities will
also be reduced due to lockdown measures. It is thus
important to tap on the African Continental Free Trade Area
(AfCFTA) that started effectively in 2019. With the projected
total population of 1.2 billion, a GDP of US$3.6 trillion and with
29 countries including South Africa that has deposited
instruments of ratification, the AfCFTA will be a notable force
to push trade and economic growth. Intra-African trade could
be doubled with the elimination of tariffs and non-trade
barriers. The continent could become more self-sufficient.
Director
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© SMU Emerging Markets 2020
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Sources:
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BloombergQuint. (2020). South Africa Struggles to Contain Coronavirus While the Economy Crumbles. https://www.bloombergquint.com/businessweek/south-africa-covid-pandemiccrisis-collides-with-economic-political-strife
Deloitte. (2020). Deloitte commentary on South Africa Budget 2020/21. https://www2.deloitte.com/content/dam/Deloitte/za/Documents/tax/za-budget-2020-21-commentary.pdf
Global Food Security. (Volume 95, 2020). Covid-19 lockdowns, income distribution, and food security: An analysis for South Africa.
https://www.sciencedirect.com/science/article/pii/S221191242030064X
IMF. (2020). South Africa Looks Toward Inclusive Recovery to Stabilize Debt, Boost Growth. https://www.imf.org/en/News/Articles/2020/08/03/na080320-south-africa-looks-towardinclusive-recovery-to-stabilize-debt-boost-growth
McKinsey. (2020). How South African SMEs can survive and thrive post COVID-19. https://www.mckinsey.com/featured-insights/middle-east-and-africa/how-south-african-smes-cansurvive-and-thrive-post-covid-19
The Conversation. (2020). South Africa’s new budget cushions the coronavirus blow – but only briefly. https://theconversation.com/south-africas-new-budget-cushions-the-coronavirusblow-but-only-briefly-141478
Database:
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EMIS
IMF
The Trading Economics
World Bank