As some business leaders clamour for the end of lockdown and a few government voices question some of the rules, a broader reality is being ignored: locked down or not, South Africa faces a rising risk of sovereign bankruptcy.
The lockdown has hurt the SA economy. No one denies that. And it seems to be failing at its core job of protecting the vulnerable – the poorest and sickest people in South Africa, who live in crowded conditions with no running water, are not practising social distancing. Because they can’t.
But all that aside, there is a bigger global picture. And that picture looks roughly like this. Global economic output is falling. The IMF is predicting the worst global downturn since the Great Depression, made all the more shocking by its speed and universalism – every country on earth has been hit at the same time.
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The world’s growth engine, China, has tentatively reopened. But its recovery has been very slow, and new outbreaks are prompting new lockdowns. China is facing a very long and slow road back to normal and it is not going to be pulling the world upward the way it did after the global financial crisis.
The world’s leading economy, the US, is in tumult. Lockdowns are being implemented and lifted in a piecemeal fashion. While infections in New York City, the worst-hit place in America, are declining, infections are rising or plateaued in 33 of 50 states. As lockdowns lift, we can expect to see rolling outbreaks and, perhaps, a second peak at the end of the year in the northern hemisphere’s winter, which will dent consumer and business confidence. It will take years for the 30 million or so jobs lost in March and April to return. While the US may return to growth this year, it’s going to be slow and painful.
Europe is still battling serious outbreaks in places like the UK, Italy, Spain, and France. While lockdowns are easing, normal economic activity is a long way off. And, for countries in the eurozone, a German court decision threatens the EU’s economic rescue plans. We can expect disarray and a prolonged economic freeze from Europe.
Against this stark background, small emerging markets like South Africa are in very serious trouble. No one likes to hear it, but the simple reality is that emerging market bonds have been hit hard by the crisis (see chart below, from the FT). SA is among a group of fragile emerging market borrowers, with a rising government debt-to-GDP ratio, low (and now negative) economic growth, a recent debt downgrade to junk, and a weakened currency. The simple fact is that our bankruptcy risk is rising.
SA thus faces a difficult set of challenges. First, it must navigate the path of the Covid-19 outbreak. Cases are rising and hospital and healthcare capacity remains poor. Lockdown doesn’t seem to be having the desired effect, likely because of difficult conditions in many communities.
Second, SA must prepare for an emerging market debt crisis. Highly vulnerable countries including Lebanon, Zambia, Argentina, Rwanda, and Ecuador are already exploring or beginning debt restructuring programmes. Investors have not fled the market, but they are demanding higher yields in anticipation of future defaults. What’s more, the FT has suggested that creditors – which now include a lot of private investment funds, hedge funds, and ETFs – are going to be less likely to offer debt relief, preferring to pursue repayment through the courts.
And so, the spectre of bankruptcy. SA has sought emergency pandemic funding from the IMF and is going to have to issue a lot of bonds this year to cover the cost of its stimulus programmes on the back of a shrinking economy.
Even if lockdowns lift tomorrow, growth is not going to rebound. There is no global appetite for goods right now and it will take time to recover from the disruption of the lockdown. Domestic demand is going to be strained by the weakened rand and the lockdown job losses. Thus, SA is facing a very challenging debt burden. And, while countries like the US, Japan, and others have shown an ability to carry heavy debt loads without taking strain, the same won’t be true of SA.
A lot of our borrowing is in hard currency – that is, in US dollars – which protects lenders but raises the risk to us. Repaying in dollars is getting tougher as the rand depreciates and tax revenues fall. We’re at risk of entering a vicious cycle that ends in default.
Sovereign bankruptcies happen, quite a lot in fact. In the last twenty years, Argentina, Greece, and Venezuela have all defaulted, as have a dozen other states. Bankruptcy is painful and disruptive for countries. States are often forced to cut spending sharply as a prerequisite for getting funding from the IMF or other creditors. This often leads to high unemployment, weakened public services, and much slower economic growth. Domestic savers lose out as currencies depreciate.
For SA, bankruptcy and default could be very damaging. It could lead to government slashing spending in the middle of the post-Covid depression, which would be very painful for poorer families (and richer ones too, eventually).
We need a national conversation about lockdown – one that is informed by reason, science, concern for all human life, and mutual goodwill. But we also need a national conversation about the economy. SA is going to be facing some very tough choices in the next two years and many of them will be forced on us by global developments out of our control. It is essential that everyone understand the dangers, risks, and trade-offs we face so that we can make the best possible decisions in the circumstances.
