The Government of South Africa revealed a ZAR500bn ($26bn) package as the country is now facing twin crises of having its sovereign credit rating downgraded to junk status and the rapid spread of Covid-19 that has led to the entire country being locked down.
The support plan is positive and provides some hope for the economy, given the scale of the economic and social problems challenging South Africa and it also should give a boost to an ailing construction sector. The package strengthens the political standing of the president Cyril Ramaphosa who announced measures for beginning to phase out the lockdown to help the economy recover.
The plan will be funded by reprioritising ZAR130bn ($6.87bn) of expenditure from existing budgets and borrowing from domestic and international lenders. There will be ZAR200bn ($10.5 billion) in guarantees for banks to encourage them to lend, a ZAR100bn ($5.3bn) allocation to safeguard and create jobs and an additional ZAR50bn ($2.6bn) for welfare grants for the poor and unemployed.
The support package is equal to approximately 10% of South Africa’s GDP and will add to government debt, which was getting close to unsustainable levels before the Covid-19 pandemic. The World Bank, the IMF, the New Development Bank and the African Development Bank (AfDB) are among the institutions that have been approached for additional funding options.
While details of how funding will be redirected will be revealed later in an adjustment budget (without a specific date), manufacturing is expected to receive some of that boost given it is the country’s fourth-largest industry, and Covid-19 containment measures have hard hit the industrial sector in South Africa. The sector contributes 15% to GDP and accounts for more than 13% of jobs.
Prior to the Covid-19 outbreak, the outlook of South Africa’s manufacturing production was subdued due to flat commodity prices and restricted global and domestic consumer demand. According to GlobalData, the total value of industrial construction in South Africa reached $1.77bn in real terms and is expected to dip to $1.66bn before increasing to $1.69 in 2021.
The expected lower value in 2020 is in line with the recent Absa Purchasing Managers’ Index (PMI) trend for 2020 with the latest index data in March recording 48.1. A reading below 50 points indicates a contraction in manufacturing activity. This was mainly linked to the Covid-19-induced disruptions in global supply chains.
Meanwhile, the business activity and new sales orders indices stayed at 11-year-low levels in March, partly due to the start of a 21-day lockdown imposed by the government to curb the spread of the virus. This indicates that April factory figures will likely show a profound contraction. An extension of the lockdown is likely to cause some factories to shut permanently.
Ford Motor Co announced it would temporarily shut down vehicle and engine production in its manufacturing sites in the country in response to the Covid-19 outbreak. The downturn in manufacturing suggests that there is a high risk of plans for investments in new or expanded manufacturing plants being cancelled.