Making sense of COVID-19’s impact on South African businesses
As South Africa enters the last week of the 21-day lockdown to contain COVID-19’s spread, attention is turning to how the economy can recover. It was a foregone conclusion that the lockdown would damage the country’s economy, even though it was an entirely necessary action and no doubt saved many lives.
The pandemic also devastated economies across the world by toppling houses of cards everywhere. Though the global economic system has been incredibly beneficial, it’s now also clear that the system needs to be reinforced in some places and rethought in others.
For this purpose, e-SEK (www.esek.co.za), a consultancy and technology provider in the corporate governance and executive management spaces, has compiled a summary of the acknowledged and potential problems that are emerging in COVID-19’s wake.
“Right now, South Africa doesn’t have the luxury to mince its words,” said Denice Manganye, Managing Partner at e-SEK. “We must look at COVID-19’s impact soberly and honestly. It’s not an easy conversation to have, but any attempt to shield ourselves from this emerging reality will only lead to more problems. Risk management professionals, executives and boards know that they can’t shy away from COVID-19’s consequences, so we compiled this summary to encourage conversation and debate. If we work and plan together, we can come out of the pandemic stronger and more prepared as a country and economy.”
The summary, available below, looks at how COVID-19 is compounding existing challenges within the South African economy, as well as additional damage. It then zooms in on specific sectors, pondering their situation as well as their options.
Some of the suggestions include:
- Growing domestic markets to support local manufacturing output.
- Creating more beneficiary refining sites to maintain resource value chains within SA.
- Reducing reliance on supply chains from heavily affected and vulnerable countries.
- Revisiting business models and risk strategies to improve their resiliency.
- Accelerating connectivity to invest in e-learning and telemedicine.
- Treasury-led development of local trading platforms to link local suppliers and buyers.
COVID-19 has already changed the world. It’s not an event with a clear beginning or end, but rather a tectonic shift underneath the foundation of the modern world. It is tough to predict what will happen next. So we must prepare and ask the tough questions.
This is why e-SEK developed the summary. Perhaps it can spark debate and conversations in a time when we should be looking for solutions.
Grappling with the challenges during and after COVID-19
The COVID-19 pandemic, also called the coronavirus pandemic, is an unprecedented event in modern world history. While comparisons can be drawn to past epidemics and other examples of global disruption such as wars, the situation is nonetheless unique in its impact and unpredictableness.
COVID-19’s lasting impact is twofold. There is the ongoing threat to healthcare infrastructure and the physical wellbeing of nations. Then there is the financial fallout being caused by reactions to try and contain the pandemic. Though it is broadly and correctly accepted that avoiding the possibly devastating human death toll caused by COVID-19 is the top priority, a sober look at the economic consequences will help organisations make the correct decisions when recovering from the epidemic.
Impact of COVID-19 on SA economy
South Africa’s economy was already in a tough position before the pandemic’s arrival. The combination of public sector debt, particularly among major state-owned enterprises, ongoing load-shedding that inhibits productivity of major economic sectors such as mining and manufacturing, and an already-low growth rate, have created a precarious situation that demanded urgent remedies.
But whatever time stakeholders thought they had to respond, that was stolen when COVID-19 appeared. After a brief period to study the infection rate and impact of the pandemic in other countries, the Presidency decided to act and announce a lockdown that would help slow the spread of the virus as well as give time for medical responses to prepare.
South Africa had taken among the most aggressive action in the world against COVID-19, learning from the devastation currently being experienced in Italy and Spain. Countries that have taken a more wait-and-see attitude, implementing lighter measures, are experiencing much higher surges than those that acted more heavy-handedly.
Nonetheless, mitigating the virus won’t mitigate financial damage, and many experts now agree that a global recession is both very likely and due to last for a while. As even the world’s healthiest economies now face negative growth rates, developing economies find they lack the financial resources to accelerate recoveries.
In South Africa, the already precarious position of its finances will undoubtedly become a crisis that nobody can deny. To mitigate this crisis, it is important to understand how this crisis will likely manifest.
Factors of SA’s post-COVID-19 financial crisis
The combined effects of existing financial stressors, such as load-shedding and COVID-19, are not unfamiliar to anyone who had paid attention to the situation beforehand. The first takeaway is that South Africa’s already meagre growth will shrink even further and quite likely continue the recession it entered in recent months. The Reserve Bank anticipates a 4% contraction in 2020.
There will be a notable drop in productivity across the board. This is most obvious among major contributors to GDP, such as mining, but also through indirect consequences. For example, reduced trade with China and India will hurt the mining sector. Other indirect consequences include the inability of retailers to pay rent, thus denying landlords.
Unemployment will rise sharply. Job losses are certain in mining and manufacturing. Drops in productivity and consumer spending will contribute to a long-tail of employment losses, particularly in sectors such as logistics and retail. There will also be significant export slowdowns, in part due to lower productivity, but also because major trading partners such as China and India will scale back as their own productivity and economies are impacted.
It has been said that more businesses may go under during COVID-19 than lives lost. While that statement has not been verified with data, it still illustrates the devastation awaiting the commercial sector. There have already been some dramatic failures as a result – such as Edcon – and more are sure to follow. This will impact the state’s tax revenue, such as for VAT and PAYE. The rise in unemployment will also put pressure on UIF while shrinking the contributing base. Personal income taxpayers are also going to shrink in numbers.
The financial sector requires additional attention. Not only is it prey to all the problems described above, but it will also be hurt as debtors fail to make good on their obligations. Though short-term ‘payment holidays’ have been introduced, it will be harder to mitigate damage in the longer term. In the worst-case scenarios, these combined factors could threaten the solvency of major and minor financial institutions.
South Africa should also be concerned about two specific sectors. The first is the disruption of education. With skills shortages already a major challenge, any delays in the education year will delay qualifying skilled graduates, and also exacerbate unemployment. There is a real possibility that a year in education could be lost.
Tourism is, likewise, very negatively affected. One of the unusual impacts of COVID-19 is the grounding and large-scale devastation of the airline industry. Current travel bans are stopping many airlines from operating. But even if restrictions were lifted, valid infection concerns among travellers will limit leisure travel. At the same time, a global recession will reduce disposable income used for holidays and travel.
Consequences of the financial crisis
The consequences of this growing financial crisis are dire, and several can’t be avoided. One such threat – relegating SA’s credit status to junk – has already occurred. The rand has also already taken a knock to some of its worst historical levels.
South Africa’s reputation as a preferred investment destination will worsen, and it is very likely that several SOEs will default on their debt obligations. This will negatively affect their investment ratings, forcing the state to act as debt guarantor. The downgrades will add pressure to the fiscus, and the state will be forced to both consider selling off SOEs and reduce its public wage bill.
Mass retrenchments in the state are very likely and will hurt an already struggling sector. These will aggravate relationships with unions and dissent among political stakeholders.
Private sector companies will also face rating downgrades. These actions will affect their liquidity and viability, leading to additional unemployment. South Africa’s Gini coefficient will rise as social inequality grows.
Despite the prospect of -10% growth, the state will have to accrue debt to soften these impacts. In particular, it will need funds to avoid the collapse of the financial sector. Bailout and stimulus packages for long-term viability will be required. Short-term interventions are also necessary, but the only way out of this crisis is to play the long game. Whatever the cost, South Africa cannot afford the collapse of its financial sector.
Overall, South Africa must anticipate its current debt-to-GDP level to grow from 70% to 90%.
Planning for the future
It would be inappropriate for this document to comment on the overarching actions the state could take. Instead, the focus here is on what individual companies such as state entities and private organisations can do.
This is not the time for complacency. Boards must review their business plans, business models and business continuity strategies. COVID-19 is not an event with a defined beginning or end. It’s likely to remain an ongoing threat and require different responses at different times. Additional lockdown periods and other disruptions are very likely.
Organisations must look at what will ensure their financial sustainability during these periods of uncertainty. Those that adopt a wait-and-see attitude or assume that the crisis will resolve itself are in the biggest danger. The epidemic demands direct and clear plans. At the least, organisations must develop 12-18-month plans to navigate the near future of the crisis.
Supply chain policies must be reviewed, particularly if organisations or their partners rely heavily on imports from major economies such as China, India and the USA. Alternative supply chain models should be found and local manufacturers should be prioritised. This can stabilise local supply chains and act as a stimulus for employment and economic growth.
Risk management plans and policies must be reviewed. Even if a company has plans in place to manage a pandemic event, the instability and fluidity of the situation don’t leave room for complacency. Those that have prepared should prepare some more. Among the new risks are those of a legal nature. With the potential of mass retrenchments comes the threat of CCMA cases and other legal barriers such as liquidation and litigation. Contracts must also be reviewed to look for liabilities and recommend mitigating actions.
Sector-specific impacts and opportunities
In addition to the above concerns, there are also risks and mitigations that specific sectors should be preparing for.
Mines must assess their risk exposure to export markets. The globe’s major economies will go through stages of recession and slow growth, reducing their demand for imported resources. Forced retrenchments may spark civil unrest and strain relationships with unions and local communities. One mitigation strategy is to look at local beneficiation – creating refinery facilities and other services that keep more of the resource life cycle in the country.
Manufacturing should be wary of reduced demand for their products abroad. They should anticipate significant continued supply chain interruption, particularly those manufacturers that are close to the mining industry. Manufacturers should look towards manufacturing more for local markets and work with their value chains to grow those markets.
Transport and logistics
The reduction in mining, manufacturing, retail and export activities will have a negative effect on transport and logistics. It will have more capacity than there will be demand. As with previous mitigations, the damage can be reduced by focusing more on business models that produce for local markets and domestic consumption.
Retailers will be under pressure from rent payments as well as lower consumer spending capacity. They are also being hurt by the slower exports from China – a problem already raised in March during the early stages of the pandemic. Though certain items, such as food, have good local supplies, imports from China account for up to 60% of items such as textiles and clothing. Retailers should consider major restructuring to make their businesses leaner. They must assess their exposure to markets such as China, and cultivate alternative suppliers. This is an opportunity to grow support for local producers. Retailers should also look to expand variable store hours to accommodate any future disruptions through social distancing and lockdowns.
An added consideration should go to landlords. Rent payments are a looming problem, both on the level of individuals as well as companies. Several major retail chains have already mulled or declared no rent payments until trade resumes, with the intention to negotiate with landlords. Landlords need to prepare for this disruption and how their actions can help revive the economy. Plans must be drawn to help landlords mitigate losses and maintain their own solvency. Overall, it is important to sustain property as an investment class. Historically resilient, property can act as a safe harbour and offer a vehicle for investors to stay in the country.
Tourism and hospitality
The pandemic has brought most significant travel activities to a halt, in particular affecting tourism sectors. Hotels and similar businesses were among the first and hardest hit by the pandemic and subsequent social distancing/lockdown activities. At this stage, it is not possible to predict the future of businesses in this sector, and they should assume the worst. They must assess their risks and review their operational models. One near-term source of relief can be to offer hotel facilities as quarantine sites and charge the state to cover operational costs.
Millions of students are currently stuck in their academic year. This is particularly worrying for higher-education students, where delays can incur heavy costs and social penalties. The academic year should not be disrupted. Mitigations include fast-tracking online learning – the state must help rural communities establish the appropriate connectivity and access to devices.
The financial services sector is in a very precarious position, faced at the same time with a lagging economy, growing unemployment and large-scale debt defaults. Payment holidays have been introduced, but it remains to been seen how sustainable these are. Financial institutions must consider the prospect of longer payment holidays – one mitigating action is to focus such payment holidays on low-income debtors for longer periods such as eight months. They must also consider that some debts will have to be written off.
Municipalities have found their already-meagre resources challenged by demands to meet the pandemic. This is a wake-up call to review municipal finances and address debts concerns urgently. Municipalities will need to engineer fiscal breathing room as they will work alongside the state to support citizens during the pandemic and its fallout. One mitigation is to consider suspending utility bills for short periods.
The telecommunications industry is arguably one of the least affected by the pandemic. Such companies have benefited from social distancing and remote working. But this means these companies are also well-positioned to make greater contributions towards undoing the damage of the pandemic. One positive action would be to give all citizens free data. Assist industry sectors in distress with the modernisation of their technology infrastructure.
The National Treasury is under incredible pressure to mitigate the broader and longer-term impact of the pandemic, as well as create short-term interventions to save the economy. Despite protests against the idea, it is inevitable that the Treasury will have to borrow from institutions such as the BRICS Bank, IMF and World Bank. It will need those funds to create a stimulus for municipalities and state-owned enterprises. It can also spearhead the development of online trading platforms that can link local supply chains and encourage more domestic trade. This will align with mitigations for sectors such as mining, manufacturing, retail and logistics.
The damage of the pandemic on the medical sector remains to be seen. The pandemic is placing severe pressure on medical resources and people. It also exposes shortcomings in the healthcare systems. The post-pandemic period is an opportunity to soberly assess and improve the sector’s readiness to anticipate and respond to major outbreaks like the COVID-19 pandemic. When taken in the context of other technology-enabled remote activities, such as online studying, the same investments in connectivity and technology can be used to improve services such as telemedicine and centralised online patient management system.