Covid-19 Pandemic: African Macroeconomic Insights from the World Bank

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Alexandre Vaillant

On 8 April, the World Bank published Africa’s Pulse, No. 21, spring 2020: An Analysis of Issues Shaping Africa’s Economic Future1. In this article, we will unpack the main elements contained in this report in the midst of the COVID-19 crisis, and take a closer look at aspects that apply specifically to South Africa.

In 2019, the global economy grew by 2.4%, its lowest rate since the 2008 global financial crisis. A rebound was to occur in 2020, based on the recovery of a few large emerging markets, although growth was expected to be slow in China, the EU, and the United States. However, because of the COVID-19 virus, the rebound is unlikely to occur, and the global economy will instead contract in 2020.

Data suggests that the economic disruption from the COVID-19 virus is extensive, and the global economy is falling into a recession. In late February this year, a week after reaching an all-time high, the S&P 500 experienced one of the fastest declines in its history, and currently stands about 25% below its recent peak.

The prices of most commodities worldwide have also been declining since mid-January, with the notable exception of gold, which has benefited from its safe-haven status and gained about 9%. Oil prices fell even more precipitously following the announcement that Saudi Arabia and the Russian Federation will boost oil production. The Brent crude price had its worst one-day decline since 1991 in early March, and now stands at around $30 per barrel.

In response to these economic developments, central banks around the world have taken bold steps to provide further monetary accommodation, boost liquidity, and ensure the smooth functioning of financial markets. Large-scale fiscal stimulus measures to mitigate the economic effects of COVID-19 are being deployed across the world to support households and the business sector. Nevertheless, containment measures, heightened uncertainty, financial market turmoil, and stringent cross-border travel restrictions are expected to weaken global growth significantly through the first half of the year, and potentially longer.

In comparison to other pandemics, or to the 2008 financial crisis, the COVID-19 pandemic is having a more severe impact on the global economy due to:

  • a greater direct impact on human lives;
  • the significance of China in a world economy that is increasingly interconnected;
  • the economic severity of mitigation measures that countries worldwide are having to implement.

Relative to the SARS outbreak in 2002, China plays a substantially larger role in the global economy today and in commodity markets.

Together with the USA, Japan, Korea, Germany, France, Italy, Spain and the UK, China accounts for half of global production and half of global consumption. This group also accounts for almost 2/3 of the manufacturing output in the world and more than half of the global manufacturing exports. Accordingly, deceleration of economic activity in these countries will produce “supply-chain contagion” in virtually all nations.

COVID-19 is a supply shock and a demand shock. On the supply side, there is a decline in employment as a result of workplace closures and travel bans. The resulting output contraction can be partly mitigated due to digital technology and cloud-based collaborative software and databases. However, some tasks cannot be performed remotely, and require workers present on site.

On the demand side, consumers and businesses have deferred spending given the current uncertainty of the global economy. Additionally, access to goods and services has been reduced as stores are shut down (or service hours are cut) in line with in-country risk mitigation policies and some countries have suspended home delivery services.

In Sub-Saharan Africa, broadly speaking, the following are some of the main impacts the COVID-19 pandemic will have on economic activity:

Disruption in trade and value chains:

Growth deceleration in major economies, including China, will affect the demand by such economies for Sub-Saharan African exports, reducing the international price of commodities exported by the region – especially oil, mineral ores and metals – and affecting countries with strong value chain participation, especially in the manufacturing sector.

Even when the spread of COVID-19 has been contained in most African countries, the trade channel would still impose large shocks to these economies. This is heightened by the fact that China has become the main trading partner for most Sub-Saharan African countries in the aftermath of the 2008 global financial crisis, and that the level of product diversification in the region as a whole is significantly lower than its Asian counterparts (Bangladesh, Cambodia, Indonesia, and Vietnam). There is however a great deal of heterogeneity across Sub-Saharan African countries in trade exposure to China. Angola, Congo, Equatorial Guinea, Gabon, Mauritania, Zambia are not only highly exposed to China, but also to commodities. DRC, Ethiopia, Guinea, Liberia, Lesotho, Madagascar, Mauritius, Togo have low commodity exposure but high exposure to China. Côte d’Ivoire, Ghana, Guinea-Bissau, Mozambique have greater exposure to commodity markets but low exposure to China. The rest of the countries have lower exposure to China and the world commodity markets.

Lower foreign direct investment (FDI) inflows and financial effects:

The sharp drop in the international price of energy commodities as well as mineral ores and metals, together with the behaviour of global investors shifting their demand towards safe assets, might contribute to lower financing inflows into the region. Greater FDI into the region was primarily driven by an increase in resource-seeking FDI and a recovery of inflows to South Africa (especially in the automotive and renewable energy sectors).

With reduced financing, the delivery of infrastructure projects may be delayed as traditional donors such as bilateral development banks are now at the epicenter of the COVID-19 outbreak and may redeploy their resources to support the segments of the population that are most affected by the economic implications of the virus. Lower foreign aid inflows will affect mostly low-income countries, especially those in already in a fragile state.

Remittances, which have become an important source of foreign financing in 30 of the 48 countries of the region, will also dwindle, especially in countries such as Lesotho (15.7% of GDP in 2019) and Zimbabwe (8% of GDP) which are very dependent on foreign remittances, especially from South Africa.

The spread of COVID-19 and plunging oil prices could trigger capital flight from Africa – especially, as portfolio investments flow out of countries where investors purchased local currency securities (Ghana, Nigeria, and South Africa).

Further, the profile of public debt in the region has become riskier due to lower concessional borrowing and rising obligations with non-Paris Club governments and private creditors. The median rate of inflation in the region is projected to rise from an estimated 2.8% in 2019 to 3.5% in 2020. Additionally, fiscal space in Sub-Saharan countries is narrowing. Resource abundant countries are experiencing deteriorating fiscal positions and fiscal pressures are mounting as commodity prices decline. This shock will be hardest in Angola and Nigeria where energy commodities account for 88% and 76% of exports. The fiscal crunch may be worsened by an increase in external borrowing costs.

Current account deficits are widening in Sub-Saharan Africa. About half the countries in the region (24 of 47) have a current account deficit exceeding 5% of their GDP, with 13 countries having external deficits greater than 10% of their GDP. Public debt across countries in the region has increased at a faster pace since 2013, and has come along with changes in the composition of government liabilities that have yielded a riskier debt profile. Six countries in the region also have a level of external public debt exceeding 40% of GDP2.

In addition to the flow of funds, the sudden stop in domestic, regional and international travel is likely to hurt tourism sectors in Sub-Saharan Africa. Countries that rely heavily on tourism revenues will be significantly affected, especially where such contributions account for 20% or more of the GDP3.

Health:

Service coverage is lowest in the Sub-Saharan Africa region, especially low-income countries. The region has not only a health service coverage deficit but also health spending that is well below the recommended level. Most of the countries in the region have critical shortages of health professionals, often combined with considerable numbers of unemployed health professionals due to financial constraints.

On average, Namibia, Mauritius, and South Africa have over 2.5 hospital beds per 1,000 people. Mauritius has the same number of hospital beds that Italy does (3.4/1,000) but lower than that of China (4.2/1,000). In addition to a call for strengthening the health care systems in the region, a series of interventions such as social distancing and self-quarantining have been recommended. Such measures will slow the spread of COVID-19 but will have a severe economic impact on the implementing countries. With a few exceptions, such as South Africa, self-quarantining and social distancing as practiced in China or in other advanced economies may not be effective mechanisms to slow the spread of the virus in Sub-Saharan Africa. Self-quarantining and social distancing are especially challenging for a continent where 85% of the population lives on less than $5.50 per day and 70% of city dwellers live in crowded shantytowns.

A lockdown could entail severe hardships in countries where most of the population work as farmers or self-employed entrepreneurs in the informal sector and need to remain active to support their families. Modelling conducted by Imperial College (2020) suggests that Sub-Saharan Africa could face roughly 1 billion infections and 2.4 million deaths under an unmitigated scenario, where the disease is allowed to spread unimpeded. Under a moderate mitigation scenario, the forecast is around 450 million infections and 1.2 million deaths (50% from situation A). Under more aggressive actions by the countries to suppress the spread, infections could be kept as low as 110 million, with 300,000 deaths (1/8th of situation A). An analysis from the Organisation for Economic Co-operation and Development (2020) estimates that the initial economic costs of shutdowns could exceed 15% of GDP in South Africa during 2020 and over 25% of GDP in the USA. Comparable estimates for additional Sub-Saharan African countries are not yet available; however, it is likely that shutdowns could carry high levels of cost to GDP, while also creating increased risks to the population, including hunger, starvation, impoverishment, as well as political backlash. The Africa Centre for Disease Control (CDC), part of the African Union, guidelines (2020) warn against “measures…that cause severe negative impact on the social wellbeing and economic progress of countries”.

Disruptions caused by containment and mitigation measures imposed by governments and the response of the citizens:

Several factors pose challenges to the effectiveness of containment and mitigation measures against the spread of COVID-19 in Sub-Saharan Africa, – large and densely populated urban informal settlements, poor access to safe water and sanitation facilities, and fragile health systems.

COVID-19 will also have important longer-term costs from a halt in human capital accumulation. Distance education, remote learning programs, and online training are being put in place on a countrywide scale. However, distance learning protocols will be difficult to implement in many areas, due to the region’s modest internet penetration. On average, less than 20% of the African population has access to the internet (90% of the in advanced countries and 60% in other developing countries). Innovative approaches are needed to avoid a larger pause in teaching and learning among low-income countries. These countries should be considering other forms of learning, such as radio, television and cell phone.

When designing policies to fight COVID-19, the following elements should be kept at the top of one’s mind:

  • Short-term fiscal policy should aim at redirecting government expenditure to increase the capacity of the health system to provide adequate and affordable medical attention to the people affected by COVID-19, and to provide income support to the most vulnerable segments of the population.
  • African policy makers need to think ahead about the exit strategy from COVID-19. Once the containment and mitigation measures are lifted, economic policies should be geared towards building future resilience. African economies still need to design policy pathways to achieve sustainable growth, economic diversification, and inclusion.
  • The long-term economic package should also include investments that account for resilient infrastructure, cities, and societies.
  • Ambitious infrastructure projects in energy, transport, water, and urban development should include the development of green infrastructure (electric vehicle charging infrastructure, bus and bike lanes, electricity transmission, distribution systems, water and sanitation service coverage, etc.). Policies to achieve economic diversification should also aim at increasing the sophistication of export products and the creation of or integration into regional value chains – as intra-industry trade is fostered by the AfCFTA Agreement.
  • Freer trade flows are critical in providing access to essential medical goods and services to help contain the spread of COVID-19 and treat those affected; ensuring that the underprivileged receive access to food, which will boost immune systems and contribute to the ability to resist COVID-19; providing farmers with necessary inputs (seeds, fertilizers, equipment, and veterinary products) for the next harvest; and supporting jobs and maintaining economic activity in the face of a global recession, as substantial disruption to regional and global value chains will reduce employment and increase poverty.
  • Borders need to be kept open as much as possible for trade while being consistent with a strategy of containment, and in line with the multilateral provisions of transit. Although it is deemed necessary to contain the spread of COVID-19, closed borders make it difficult for medical supplies and other necessities of life to reach people in outer lying areas and regions. Small-scale cross-border trade contributes to the livelihoods of about 43% of the region’s population, predominantly the underprivileged and women. Dominated by agricultural and livestock products, such trade is also essential to maintain food security and hence welfare and poverty reduction.

Where does South Africa lie in all of this? The country’s economy was already fragile as it entered the COVID-19 crisis, despite a pickup in economic activity at the start of 2020. Interest rate cuts and quantitative easing announced by the South African Reserve Bank will provide some support to consumer spending and encourage lending and investment. However, a combination of low commodity prices, capital outflows (mainly, portfolio investment), reduced tourism activity and a major slowdown in key trading partners is expected to weigh heavily on economic activity. The lockdown implemented on 26 March 2020 by the President of South Africa will significantly affect retail sales and the mining sector, two key sources of growth for the economy.

South African public debt (60% of GDP in 2019) is mostly denominated in domestic currency. Although debt issuances in domestic currency help reduce currency risks, a large portion of this debt is held by foreign investors that participate in the local securities markets (mostly in short-term investments). Therefore, foreign investments could induce sudden outflows at any moment, which could exacerbate exchange rate volatility and lead to a depreciation of the South African Rand against major currencies. In addition, South Africa’s outstanding public and publicly guaranteed debt (PPG), though relatively low (20.9% in 2018), is mostly owed to private creditors (94.5%). This composition may disclose certain vulnerabilities regarding debt sustainability.

On 21 April, the President of South Africa announced a string of economic measures amounting to ZAR 500 billion (10% of the GDP), mostly in line with the recommendations above.

In particular, the President announced an extraordinary health budget to respond to the COVID-19 crisis. These measures relate to the relief of hunger and social distress, support for companies and workers, the phased re-opening of the economy and mention was made of a substantial infrastructure build programme, to come. The funding is to come from the reprioritisation of part of the budget, and new funding from multilateral institutions such as the World Bank, the International Monetary Fund and the New Development Bank.

The reopening of the country was substantiated by the President in his speech on 23 April and entails the setting up of five levels which determine the measures to be put in place based on the spread of infection in South Africa. There will be a national level and separate levels for each province, district and metro in the country. Level 5 is equivalent to the current lockdown and means that drastic measures are required to contain the spread of COVID-19 to save lives. South Africa will move to Level 4 from 1 May.

In terms of Level 4, some economic activity (other than the current list of essential services) will resume, subject to extreme precautions required to limit community transmission and outbreaks. The National Coronavirus Command Council will determine the alert level based on an assessment of the infection rate and the capacity of the health system to respond to COVID-19.

Level 3 involves the easing of some restrictions, including on work and social activities, to address a high risk of transmission. Level 2 involves the further easing of restrictions, but the maintenance of physical distancing and restrictions on some leisure and social activities to prevent a resurgence of COVID-19.

Level 1 means that most normal activity can resume, with precautions and health guidelines followed at all times. Economic sectors have been classified according to the risk of transmission in such sector, the expected impact of the lockdown, the economic contribution of the sector and the effect on livelihoods. Relevant Ministers will provide a detailed briefing on the classification of industries and how each is affected at each level.

It is unclear at this stage how long the country will remain at Level 4, and what the economic consequences will be long term. Only time will tell if the current package announced by the President will be sufficient in the light of the impact of COVID-19 on South Africa’s economy.