South African President Cyril Ramaphosa announced a $26 billion fiscal stimulus package, the largest in his country's history, to tackle the economic fallout from the coronavirus.
The package, which amounts to almost 10% of South Africa's gross domestic product, will be funded by the redirection of expenditure from existing budgets and additional borrowing from domestic and international lenders.
The cash will be allocated toward guarantees to banks so as to encourage lending, protection and creation of jobs, and welfare grants to the poor and unemployed, Ramaphosa confirmed.
He also revealed that the World Bank, the IMF, the BRICS New Development Bank and the African Development Bank had been approached for loan financing.
"We are resolved not merely to return our economy to where it was before the coronavirus, but to forge a new economy in a new global reality," Ramaphosa said in an address to the nation.
"Our economic strategy going forward will require a new social compact among all role players — business, labor, community and government — to restructure the economy and achieve inclusive growth."
Debt deterioration
The aggressive fiscal measures have been met with widespread public support, and World Health Organization Executive Director Mike Ryan on Wednesday lauded South Africa's efforts to quell the spread of the virus.
South Africa implemented strict nationwide lockdown measures in late March and has ramped up testing and contact-tracing efforts, thus far containing the rate of infection well below that seen in Europe and the U.S. As of Thursday, the country has confirmed 3,635 cases with 65 deaths, according to Johns Hopkins University.
But with the Treasury having already cautioned that debt was nearing unsustainable levels, and South Africa's sovereign credit rated as "junk" by all major ratings agencies, the short-term positive impact may come with greater long-term complications, both economic and political.
"High debt loads, at 59.6% of GDP, constrain South Africa's ability to fund its proposed package independently, and it will need to rely on external debt from the World Bank and the IMF's Rapid Credit Facility," said Indigo Ellis, head of Africa at Verisk Maplecroft.
"This will accelerate South Africa's rising debt-to-GDP ratio, which had been set to hit over 70% of GDP by 2023, further constraining its economic policy space."
The South African Reserve Bank (SARB) has been active in loosening monetary conditions, cutting its main repo rate twice since the crisis began to 4.25%. Ellis suggested that the central bank is running out of room to maneuver, with rising inflation exacerbating food insecurity among jobless populations in informal rural areas also heightening the chance of civil unrest.
The central bank expects South Africa's economy to contract by 6%, and although diversified enough on paper to withstand a total collapse, its main employment sectors of tourism, manufacturing and mining will take a while to ramp back up, Ellis projected.
Political fissures
One of the key challenges to Ramaphosa's bold economic reform agenda so far has been factional disagreements within his ruling party, the African National Congress (ANC).
Ellis suggested that the faction aligned with Ramaphosa's predecessor Jacob Zuma would likely challenge his leadership on the basis of any pursuit of IMF support.
"The conditionalities attached to any official IMF program will lay bare the depths of corruption and state sponsored graft in South African political structures, a hangover from former president Zuma's tenure," Ellis said in a research note Wednesday.
Zuma is currently facing corruption charges in South Africa, with the case set to resume on May 6. The National Prosecuting Authority in February issued a warrant for his arrest after he failed to appear in court on health grounds.
"The pro-Zuma faction are terrified of being prosecuted for ills committed during Zuma's presidency. The forced transparency an IMF loan would dictate, as well as the power it would give an already more proactive prosecuting body, could see them in the stands," Ellis said.