The Economic Impacts and Prospects of COVID-19

With South Africa headed into a 21-day lockdown this week, combatting the threat of the coronavirus, COVID-19, has been made a key national priority. Never before in our democracy have we seen a national lockdown taking place, but the gravity of the current situation absolutely demands it.

This is according to Marius Oosthuizen, a professional futurist who recently presented a thought-provoking webinar to over 80 investors and business leaders across the country. Hosted by the Southern African Venture Capital and Private Equity Association (SAVCA), the interactive webinar explored the current developments of the COVID-19 pandemic, unpacking the economic, social and political impacts that it is having globally and in South Africa.

“To put things into perspective, if South Africa’s 59 million people were to do nothing at this point, the country would require over 500 thousand critical-care hospital beds – we currently only have about 5500 of these, of which 88% are already occupied.” says Oosthuizen. “Fortunately, with the restricted movement being imposed through the lockdown, this number drastically decreases by 70%. This is the only way the country is able to reduce the chances of unmanageable widespread societal infection.”

Being a few weeks behind some other affected nations, Oosthuizen notes that South Africa is fortunate to have real-life case studies of countries that have handled this crisis well – such as South Korea – and those that haven’t, such as Italy and the US. “We know from the case of South Korea that the only way to effectively curb the social spread of the virus is through a combination of government and civil action early on.”

He notes, however, that South Africa remains particularly vulnerable from an economic perspective. “The pandemic started as an infection problem with a supply-side disruption from China, but has gradually moved over to a lock-down environment causing a global economic slow-down, which has precipitated the combination of a disease burden in society and a currency and fiscal crisis – something that South Africa is at major risk of.”

This economic impact, according to Oosthuizen, will play out in three waves for South Africa. “The first wave, which is currently playing out, is having a direct impact on tourism, aviation and commodity demand. The indirect impact of this will be dampened medium-term demand.”

The second wave of impact will be the disease burden, social distancing and psychological strain that will be felt over April and May. “The scale and rate of infection will depend on the scale and effectiveness of response,” he says, noting that the third and final wave of impact that the country will likely experience over June and July, will be based on adapted conduct, the level of supply disruptions, fiscal restructure and decline in earnings.

“South Africa, in addition to already being in a fragile economic state prior to this pandemic, is dependent on commodity exports and is highly exposed to Asian and US consumer markets. It is for these reasons that I believe we will face a contraction in GDP of between 3-5% as a result of COVID-19,” predicts Oosthuizen.

Moving away from the shorter-term doom and gloom, Oosthuizen insists that there will be a long-term recovery, but notes four potential scenarios for how this might play out in South Africa. “The first scenario, ‘a storm in a tea cup’, is one where there is a slow rate and small scale of infection, with ineffective response. My feeling is we have already surpassed this scenario, as we continue to see exponential rates of infection.

“This means that South Africa risks seeing the second scenario, ‘the perfect storm’, play out. Here we would see a fast rate and large scale of infection, with ineffective response,” he warns, noting that South Africa is particularly vulnerable to this scenario considering the number of people with respiratory diseases like tuberculosis, as well as the high rate of human immunodeficiency virus (HIV) among the population.

Fortunately, Oosthuizen believes that the measures needed to avoid ‘the perfect storm’ scenario are completely within the country’s control. “We are seeing these measures being implemented now with the national lockdown, which will hopefully take us into an ‘after the storm’ scenario. If this scenario plays out, the real challenge will be the economic recovery, which is why the Department of Small Business Development has already launched a debt relief fund to help mitigate the impact on smaller businesses.”

The fourth and final potential scenario that Oosthuizen presents, namely ‘Africa spared’, is a major wildcard which he says is extremely unlikely at this point. “This is a scenario where, for some exogenous reason such as climate, Africa only has a limited number of infections with effective responses.”

At this point, Oosthuizen has made it clear that South Africa is likely facing either “the perfect storm” or an “after the storm” scenario. “The most important thing for South Africa to do now, is accept these two scenarios and do everything in our power to avoid ‘the perfect storm’ from playing out. This is especially crucial considering how vulnerable some parts of the African continent are and how devastating this pandemic would be if it were to continue spreading.

“Of course, for this to be effective, South African people and businesses need to do everything in our power to follow these national efforts – together, we can flatten the curve!” says Oosthuizen.

“Given the announcement by President Cyril Ramaphosa that a full lockdown will be commencing this week, we applaud him and his team for their swift action and for liaising with private sector through his various departments to ensure that measures are being implemented to help mitigate against increased infections and economic fallout,” says Tanya van Lill, CEO of SAVCA.

“As an industry body to the private equity and venture capital industries, we understand the core role that small, micro and medium enterprises (SMME’s) play in driving the country’s economy, and the debt relief fund which has been set up is reassuring for these businesses during this period. Our leadership has shown that both government and private sector can work together during a time of crisis,” she says.

Ensuring that the private equity industry plays its part in this, van Lill has been vocal in the measures being taken internally to curb the spread of COVID-19, and continues to encourage other industry stakeholders to follow suit. “SAVCA has already demonstrated its commitment to implementing the necessary protocols by instituting various internal precautionary measures.

“As the voice of the industry, we continue to encourage all of our members and their portfolio companies to do the same through the additional support mechanisms that we have put in place, such as the COVID-19 resources page on our website, our industry WhatsApp group, and a discussion board being setup where people can stay connected and share best practice,” she comments, adding that SAVCA will continue to host weekly webinars to inform its members on developments, as well as best practise in the current new normal and considerations for when South Africa moves into the recovery phase.

ENDS