IN THIS WEEK’S BOTTOM LINE

CONTRIBUTED BY Werner Erasmus| OVERBERG ASSET MANAGEMENT

President Ramaphosa recently announced the details of a R500 billion economic rescue package, the first of its kind and close to 10% of GDP, in an attempt by government to limit the impact of the Covid-19 induced economic slowdown. President Ramaphosa referred to it as an economic package which is equal to the economic scale of the disruption caused by the Covid-19 pandemic. The R500 billion economic rescue package is not just a massive cash injection but is made up of a range of items including budgetary reprioritisation, tax reliefs and breaks, and loan guarantees.

The announcement comes on the back of similar government announcements around the world aimed at strengthening respective health care sectors, support ailing industries and provide relief to vulnerable households. The R500 billion support package is part of the second phase of government’s economic response to stabilise the economy, protect jobs, and address the extreme decline in supply and demand. Social media was ablaze after the initial announcement with many South Africans believing that the country has been sold out to international banks and financiers. Luckily this is not the case. This week’s bottom line aims to provide readers with more insight on the bailout package by taking a closer look at what this R500-billion package includes, where the funds will come from and how government plans on allocating these funds.

Where is the money coming from? The stimulus package, although announced as an amount of R500 billion, is in fact only around R370 billion in value. Of the R500 billion, R130 billion will be the reprioritisation of funds within the existing budget, the details of which will be announced by the minister of finance in a special budget announcement. R200 billion will be a bank loan guarantee scheme between the SARB, treasury and the commercial banks. The loan guarantee will encourage banks to take on more risk and lend funds at a time they would have normally been reluctant to extend credit to struggling businesses. The R200 billion loan guarantee scheme aims to assist companies, with turnovers of less that R300 million, with capital to pay salaries and other operating costs.

Further financing will include R41 billion from UIF surpluses, R70 billion deferred tax payments (VAT and PAYE) leaving a balance of R60 billion that will need to be financed through a loan from one of various financing intuitions mentioned by the president such as the IMF, World Bank, African Development Bank and/or the BRICS New Development Bank. General consensus has been negative on the idea of obtaining funding from some of these international financing institutions, especially the IMF, which has had a history in the 1980’s and 1990’s of proposing policies to developing countries that have not always been relevant. The current environment is not a crisis of our making and thus the IMF relief funding does not come with any policy conditions that will undermine sovereignty or tie the hands of policy makers. Many other countries have already applied for this special relief funding, which comes at a very low cost of around one percent with no special restrictions.

How will the funds be spent? The relief package can be broken down into the following spending categories, (a) an extraordinary health budget, with R20 billion for Covid-19 healthcare relief, (b) relief from hunger and social distress, including R50 billion for temporary 6-month Covid-19 grants, increasing existing grants, food assistance through vouchers and cash transfers and R20 billion for emergency water supply. Furthermore, (c) support for companies and workers of R140 billion for protection and creation of jobs, and a R200 billion loan guarantee scheme for SMMEs (in partnership with SARB, banking sector and National Treasury) and (d) additional tax relief of R70 billion, including fast tracked VAT refunds, delays of carbon tax payments and deferred PAYE payments.

Overall, the stimulus package announced is well targeted, but the question remains if government has the capacity to efficiently and effectively implement its plan, as this will ultimately determine how successful it will be.

Can South Africa afford this? The short answer is no. The reality, however, is that the government does not have any other option but to support the economy and its people. The silver lining is that the majority of the funding (budget reprioritisation and loan guarantees) will not be directly added to the government’s already high debt balance. The package will increase government’s spending and reduce government’s revenue through the tax deferrals and other concessions made.

However, the general understanding is that government will not have to carry the full burden of the R370 billion left after the budget reprioritisation. The R200 billion loan guarantee scheme will be financed by the major banks and will therefore not immediately affect government’s expenditure as the state and the SARB will only be called on to deliver on guarantees if the supported companies fail to recover from the Covid-19 crisis.

On the revenue side, the President indicated that the concessions amount to about R70 billion. It therefore appears as if only around R130 billion will be added to the budget deficit from the second phase of support measures.

So, where to from here? The R500 billion support package is part of the second phase of government’s economic response to stabilise the economy, address the extreme decline in supply and demand and protect jobs. The third phase is said to be the economic strategy which will be implemented to drive the recovery of the economy as the country emerges from the pandemic. In this phase government will attempt to stimulate demand and supply through infrastructure investment, the speedy implementation of economic reforms and ‘other’ measures to promote economic growth. With GDP projected to decline by 6.2% in 2020 and the budget deficit expected to widen to between 8%-10% of GDP, the need for structural reforms has never been bigger.

The pandemic offers the government an opportunity to implement structural reforms that earlier seemed out of reach as it brings another dimension of urgency to the current economic situation. President Ramaphosa reiterated this in his announcement by calling for ‘speedy implementation of economic reforms.’ The following reforms are seen as critical if government is to lift business confidence, boost growth and avoid further credit rating downgrades. The first is transforming the electricity sector, restructuring Eskom and securing electricity supply. The second is spectrum allocation, which is to some extent already underway. The third is delivering regulatory certainty in areas such as mining, land reform and the NHI. The fourth is improving the ease of doing business by lowering barriers of entry and reducing regulatory burdens on companies looking to do business.

The speed and effectiveness at which these reforms are implemented will eventually determine the trajectory of South Africa’s recovery from the economic wilderness we currently find ourselves in.

Read More: Overberg Market Report 12 April 2020