Virus could cost SA five years of potential output

Reserve Bank ready to step in with a ‘variety of additional tools’.

South Africa stands to lose five years of potential economic output due to the shock from the coronavirus pandemic and measures to curb its spread, according to the nation’s central bank.

South Africa fell into a recession even before the first case of the coronavirus was detected in the country. Economic growth projections deteriorated after the government imposed one of the strictest lockdowns in the world on March 27 that shuttered most business activity. GDP will contract 7% this year, according to the central bank.

While growth is forecast to recover to 3.8% next year and 2.9% in 2022, GDP will still be smaller than the levels recorded in 2018 and 2019, Alex Smith, the Pretoria-based SA Reserve Bank’s lead economist for the financial stability department, said in a presentation on Wednesday. “Hence, the Covid shock could result in nearly half a decade of lost output.”

Job cuts

This means the nation’s households and businesses will come under strain, with asset growth and profitability in the finance sector likely to be threatened, he said. While local banks offer smaller businesses government-backed loan relief and the nation prepares to further relax some lockdown restrictions from next month, many companies have already reported job cuts.

The central bank is ready to step in with a “variety of additional tools” available to address risks to financial stability in the country, which could worsen through the Covid-19 crisis, it said in its Financial Stability Review. It has already relaxed capital and liquidity rules for banks, cut interest rates to a record low and stepped up government bond purchases.

While South Africa banks are on average more resilient than their global counterparts, most are likely to report losses in the next year or two, Kuben Naidoo, Reserve Bank deputy governor and also head of the Prudential Authority, which regulates lenders, said on the same call.

Losses

“Our financial system is particularly well capitalised and the buffers are sufficiently large,” he said. “But let me also say South African banks are not immune to making losses, they are not immune to collapsing.”

Though credit losses among South Africa’s banks are expected to increase, these still compare well to peers such as Brazil, Thailand and Morocco, S&P Global Ratings’ Samira Mensah, a director and lead analyst for bank ratings in Africa, said in a webinar hosted by the agency.

“We expect credit losses to rise to about 1.2% in 2020, so that’s quite significantly higher than the 0.7% recorded last year,” she said. Total private credit sector to GDP will probably shrink to 80%, compared with 87% a few years ago.

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