On 6 April, 2020, we published an article outlining South Africa’s initial economic response in support of its already ailing economy against the adverse economic effects of the coronavirus pandemic. Two weeks have passed since we first published that article, and we think it is prudent to provide this follow-up, outlining the latest developments in South Africa.The number of Covid-19 cases in South Africa has increased steadily, with, as of midday on April 20, 3,158 officially reported cases. President Cyril Ramaphosa announced as a consequence an extension of the initial 21-day lockdown period, adding a further 14 days until April 30.With the social and economic effects of the extended lockdown having devastating impact on the South African economy –already in a technical recession before the first case of Covid-19 was reported in the country in early March– President Ramaphosa is reportedly considering a R1 trillion (approximately $53.5 billion) stimulus package. This stimulus packaged was discussed and agreed in principle at a meeting of the National Economic Development and Labour Council (Nedlac) on Friday April 17, and is said to be similar to the $2 trillion financial stimulus package recently announced by the United States Government insofar as it will seek to target those sectors hardest-hit by the lockdown by offering assistance to financially distressed companies. How a stimulus package of this size would be funded remains to be seen, but the imposition of a one-off wealth tax is apparently being considered. Such a stimulus package might also include further interventions by the Reserve Bank, possibly additional interest rate cuts or bond-market purchases, to inject additional liquidity into the financial markets.In addition the proposed R1 trillion (approximately $53.5 billion) stimulus package, the following are some of the additional measures announced by the South African Government to support the economy:
- Finance Minister, Tito Mboweni, announced that the National Treasury will look to revise the country’s budget, to take into account the effects of Covid-19, and to ensure reallocation of any unnecessary spending to the Government’s anti-Covid-19 measures, as well as to the financing of growth-enhancing initiatives;
- The Prudential Authority – a regulator administered by the Reserve Bank – welcomed the measures South African banks had individually taken to support customers during this period of economic turmoil and uncertainty, and announced a raft of measures to support the banking system, including lowering the liquidity cover ratio – a ratio setting out the liquid assets a bank has to maintain in relation to its anticipated outflows – from 100% to 80%. It is anticipated that these measures could, in theory, free up approximately R540 billion (approximately $29 billion) in reserves for South African banks to deploy in support of their customers;
- The Government and the banking sector are looking at establishing a ‘Funding for Lending Scheme,’ in terms of which the South African Government would provide government guarantees to South African banks, thereby enabling them to make facilities available to distressed businesses they would otherwise not be able to lend to. A similar intervention has been implemented in the United Kingdom;
- Reserve Bank Governor, Lesetja Kganyago, less than a month after his previous announcement, further cut the repo rate by 100 basis points, lowering the benchmark lending rate in South Africa to 4.25% – the lowest level since the apartheid era. In making his announcement, Governor Kganyago noted that the Reserve Bank now expects GDP to contract by 6.1%, compared to the 0.2% contraction announced a few weeks ago;
- President Ramaphosa, on proclaiming the lockdown extension, also announced that the National Executive (being the Cabinet and deputy ministers), as well as all provincial premiers, will take an immediate 33% salary cut, which they will contribute to the Solidarity Fund. A number of executives from significant South African businesses have since announced large cuts to their remuneration packages which they will contribute to the Solidarity Fund – which now boasts a balance of R2.2-billion (approximately $117 million) since it launched on 23 March – this is a clear sign that business has rallied behind President Ramaphosa;
- The exemption of commercial banks from the provisions of the Competition Act to enable them to develop common debt relief approaches has been extended to the retail property sector, the hotel industry and the healthcare sectors; and
- It has been proposed that the Government should temporarily top-up welfare grants as a poverty-relief measure for as long as the pandemic lasts.
The United States has recently also stepped up its financial assistance to South Africa, with the United States Agency for International Development making $8.4 million (approximately R158-million) available to South Africa to aid its fight against COvid-19 pandemic.
Notwithstanding these actions, criticism is being levelled at the Government for the speed at which these economic interventions are being implemented. While the Government was praised for its speed in implementing measures to control the virus, it is now being alleged that indecision and differences in political ideology are hampering the development and implementation of a comprehensive economic stimulus plan. At a special cabinet meeting held on Wednesday 15th April, failed to agree on a decisive plan, instead resolving to hold another meeting on Monday, April 20. The outcome of that meeting remains unclear.
Despite this criticism, a R1 trillion stimulus package–an amount nearly equivalent to the government’s total spending of R1.95-trillion for the current fiscal year–would be a significant step forward for a country otherwise facing a deep economic recession.
If you are operating a business in South Africa and need advice or guidance on how any of the above-mentioned provisions relate to you, please contact Mike McLaren, firstname.lastname@example.org, Chloë Taylor, email@example.com, or Mosa Mkhize, firstname.lastname@example.org.
This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.