World Economy

South Africa declares 'state of disaster' as coronavirus threatens to derail economic recovery

Key Points
  • Although confirmed cases in South Africa currently total just 62, with no fatalities reported as yet, President Cyril Ramaphosa addressed the nation Sunday night and declared a national state of disaster.
  • The outlook for the nation's economy was bleak coming into 2020, but the arrival COVID-19 is expected to further destabilize any fragile attempt at recovery.
Cyril Ramaphosa 
Foto24 / Contributor | Gallo Images | Getty Images

South Africa has imposed travel restrictions from countries most affected by the coronavirus as it looks to stave off the human and economic toll of the pandemic.

Although confirmed cases in South Africa currently total just 62, with no fatalities reported as yet, President Cyril Ramaphosa addressed the nation Sunday night and declared a national state of disaster.

South Africa has also joined a number of other African nations in imposing travel restrictions on a host of mainland European countries, as well as South Korea, the U.S. and U.K. School closures, bans on public gatherings and other emergency measures were also implemented.

"Never before in the history of our democracy have we been confronted by such a severe situation," Ramaphosa said.

South Africa also closed 35 of its 72 land border crossings and two of its eight sea ports. Kenya, Ghana and Morocco have also imposed a range of restrictions in recent days.

The outlook for the nation's economy was bleak coming into 2020, but the arrival COVID-19 is expected to further destabilize any fragile attempt at recovery.

Derailing a fragile economic recovery

The combined impact of external pressure from a deterioration of the global economy and South Africa's already weak fundamentals, including its spiraling debt profile and well-documented energy crisis, indicate that the economy will contract this year.

In a note Monday, Jacques Nel, head of Africa macro at NKC African Economics, projected a 0.8% contraction in real GDP (gross domestic product) for 2020, down from a previous estimate of 0.2% growth. NKC now expects South African exports to contract by 10% in 2020, lower than earlier expectations of a 0.3% contraction.

South Africa is a small open economy vulnerable to fluctuations in emerging market sentiment, and recent domestic circumstances have conspired to create a hostile environment for economic recovery.

"This year will be another disappointment from an economic perspective, but the recent escalation in the Covid-19 outbreak within the country implies there is a lot more at stake than foregone economic production," Nel said.

Socioeconomic conditions, he suggested, will make it more difficult for South Africa and other impacted African nations to implement the widespread shutdowns being deployed across Europe.

"The impracticality of implementing widespread self-quarantine in shanty towns or informal settlements mean that this will not be an option. Mismanagement of the situation could lead to human costs far exceeding economic losses," Nel added.

Rate cut incoming

The South African Reserve Bank is widely expected to cut rates on Thursday. Falling oil prices will weigh on the inflation outlook in the coming months and radical monetary policy easing from the U.S. Federal Reserve has freed up some space for emerging market central banks to follow suit.

Due to a weaker growth outlook and the pressure this will place on an already strained fiscal position, a credit downgrade from Moody's, which holds South Africa's last investment-grade sovereign credit rating, is now seen as inevitable later this month.

South African national flags hang above an advertisement for the new Mandela rand banknotes at the headquarters of the central bank in Pretoria, South Africa, on May 23, 2013.
Nadine Hutton | Bloomberg | Getty Images

With this now largely priced in, and given the above factors, Nel projected that the SARB will cut its benchmark rate by 50 basis points on Thursday to a five-year low of 5.75%.

John Asbourne, senior emerging markets economist at Capital Economics, said in a note Friday that a 25 basis point is more likely this time around, with a further 25 basis point reduction in May.

However, Ashbourne suggested that, unlike recent developments across a number of major economies, fiscal policy is unlikely to provide much support.

"South Africa's already wide deficit and deteriorating debt position will prevent the government from announcing significant stimulus," he added.

VIDEO6:5006:50
Josh Brown: How to protect your nest egg in volatile times