Coverage of the economic wreckage Covid-19 is causing in developed markets is everywhere. Harder to find is the damage it is doing to emerging economies. But the damage is deep. The crisis has led half of International Monetary Fund member countries to request assistance. IMF chief Kristalina Georgieva says developing economies need $2.5-trillion in funding, more than double the $1-trillion it has available. The Washington-based Institute of International Finance (IIF) says outflows of emerging-market securities topped $83bn in March, with equity outflows reaching $40bn. "All of this points to a sudden stop in emerging markets due to the combination of Covid-19 uncertainty, large oil price and financial shocks."
The IIF's analysis highlights the countries most distressed by the fallout, unhappily saying that SA is one of the most stressed emerging economies, so much so that it needs to enter an IMF programme.
"South Africa appears to not have sufficient policy room to address its challenges - now exacerbated by the Covid-19 pandemic - without multilateral support," say IIF economists Ugras Ulku, Benjamin Hilgenstock and Elina Ribakova in a briefing note issued this week.
"Economic contraction, higher borrowing costs, and the need for higher social spending are likely to add more to fiscal deficits, [making] it more difficult to keep government debt from rising further. An IMF programme could bring much-needed funding and help shore up investor confidence," the IIF says.
"It is time for South Africa to turn to multilaterals for support. The Covid-19-induced global recession, together with the economic effects of steps taken by the government to address the pandemic domestically, has made a challenging situation increasingly untenable."
— SA appears to not have sufficient policy room to address its challenges
It says persistently low growth and rising budgetary support for state-owned enterprises have led to deteriorating debt sustainability, putting SA in an already weak position prior to the Covid-19 shock. Economic contraction and higher debt funding costs will likely make SA's debt position unsustainable, the IIF says.
SA's finances ahead of the corona outbreak were under great strain after years of corruption during the Zuma era and an inability by the Ramaphosa-led government in the past two years to implement reforms fast enough. Bailouts to poorly performing state enterprises, an unsustainable public sector wage bill and the glacial reform of the electricity sector are examples of what pushed us to the edge of the fiscal cliff. Covid-19 pushed us over. The rand traded at record lows above R18 to the dollar this week. The rand is the worst-performing emerging-market currency and we can expect further weakness in the short term, says TreasuryONE's Andre Botha.
The RSA 10-year bond, an indicator of the government's borrowing cost, was trading at a yield of about 9% before the coronavirus. It jumped to above 12% when the Reserve Bank intervened by buying government bonds for the first time. After ratings agency Moody's announced last weekend it had downgraded SA to junk, it was trading just below 11% on Thursday.
The IIF said the Moody's downgrade to sub-investment grade will lead to capital outflows and rising financing costs. George Glynos of ETM Analytics says the IIF economists' analysis is "not surprising at all. This has been our thinking for a while now." He says how much and what they ask for will depend on how long the lockdown drags on.
Finance minister Tito Mboweni told the Sunday Times last week that SA may approach the IMF and World Bank about a facility that it can access for health purposes.
If you think of the national carrier, SAA, it has for far too long traded unsustainably. The corona-induced economic crisis now means it is almost certain to be beyond resurrection. Its parent, the government - and by association, all of us - is now in the same position. The poor management of public finances made us vulnerable. Now we've caught a virus for which there's no easy cure.
• Davie is a lecturer in financial journalism at Wits University
