When COVID-19 hit SA’s shores and it looked more likely that SA would institute an early shut down, my immediate concern (besides the obvious health worries about those directly affected) was how the government would support the economy given the state of public finances and the economy. I for one advocated the central bank buying up government debt, the risk of drastic currency devaluation being worth it. I didn’t think of Cyril’s strategy, one which seems to both strengthen the trust gained from society since his election, as well as silence many detractors who saw this crisis as an inevitable way to loot from the everyday man’s pension.
When assessing Cyril’s options, it’s important to understand the government’s position going into the crisis.
To summarise, public trust was low, public finances were stretched, debt had increased, and economic growth prospects looked bleak. Couple points to contextualise this:
- There was a general narrative of Cyril not doing enough since becoming president. There had been no convictions for corruption, blackouts were even more frequent and SAA was still taking bail out money;
- ANC (i.e. government) policy, including land expropriation without compensation, NHI, government controlling key industries (barring the announcement to split up Eskom) was still the same as ever, with little indication that it would be changing (the ANC voter base, I would argue, shows little need or desire to change these policies)
- Economic growth was negative leading into the crisis. Coupled with the planned deficit of 6.8% of GDP, debt to GDP of 66% (both on a pre-COVID economy) and looming downgrade from Moodys (this hadn’t happened before COVID-19, but arguably would have happened regardless), all created a lack of confidence (local and international) in the economy and its ability to grow going forward;
- There was also some concern that the government would dip into pension funds to bankroll certain public projects. This was never official policy, but was a concern for a lot of people and one likely borne out of the government’s handling of the economy and institutions over the past decade; and
- The ANC won a strong majority at the previous general election (62% of the vote). This was important for Cyril and his government to act fast without concern of being voted out quickly (more on this here).
The above makes it clear how little room the government had to act going into the crisis. They of course knew all of this and knew what they were doing when they locked down the country for 3 weeks. There is a separate debate to be had around whether it was ‘worth it’ to lock down the economy to save what seemed like a large number of lives at the time. I am not debating this here, but will note that both extremes seem out of touch. On one hand, some say the government should do nothing and let the disease run wild. The government already underwrites public health so this doesn’t make sense. The other extreme, of governments doing whatever it takes to save every marginal life also makes little sense. If that were the case, we would spend every cent our country produces on public health to try and remove all preventable harm. We have already made a decision as a society not to go this route as if we did we wouldn’t have an economy from which to make any health-related gains anyway. Although not explicitly recorded, we do put a price on a marginal life.
With that in mind, it’s worth looking at the SA government’s options for dealing with the financial impact of the lockdown when they announced it. Broadly, there seemed to be three major options:
- Spend like crazy and get central bank to fund it. This is the strategy used by US, Europe and most wealthy economies. There is a popular economic theory called Modern Monetary Theory (“MMT”) whose core belief is in the ability for governments to print as much money as is needed and government debt not being an issue (you can’t default in your own currency when you control supply of the said currency). Proponents of this philosophy acknowledge that inflation is a risk, but point to Japan, US and Europe as examples of ability to print money, take on far more debt than previously thought sustainable and not worry about inflation being a thing. The problem with this for a country like South Africa, is our reliance on imports of capital goods which aren’t priced in Rands. Printing money to buy these goods would greatly devalue the Rand, making capital goods that we need prohibitively expensive. This being the case, printing endless money didn’t seem like an option for South Africa;
- 3rd party bail out — IMF loan, or BRICS bank loan. The government seemed quite wary of this, not wanting to sacrifice SA’s sovereignty (or the political alliance with Cosatu, who saw the terms of these loans risking large job losses). Historically, countries have not fared well under these conditions , with the IMF putting very draconian measures in place. This strategy would have the benefit of creating a scapegoat down the line (“the IMF made us do it”), but brings potential unrest, further unhappiness and lack of control in the interim*; and
- Direct, forced private sector bail out. This could take many forms, but would likely see pensions and asset managers either buying government debt, being forced to take a haircut on their current debt (so that the government could issue more, similar in result to being forced to buy debt) or forcibly use the pension money for strategic projects. This strategy is very difficult given the trust levels between private sector and government. It would justify the ‘the government is coming for your pension’ crowd who have been bleating about this being on the cards for some time. It would be seen as the ANC trying to steal more money — the government would be painted with the same brush as during the Zuma years. We can be very glad that the government didn’t go for this approach. That they didn’t indicates that they still care.
With the above options all looking difficult, the government seems to have gone for a 4th strategy and one that hasn’t been used in the rest of the world and that I certainly didn’t think of. And the strategy seems to be working. How intentional this was I’m not sure, but given the ‘strategic genius’ tag that the media has placed on Cyril, it would fit right in.
What this strategy seems to be, is a nudge to a voluntary private sector bail out, working roughly like this:
- Make it publicly known that there is no fiscal room to help with the crisis, then announce a national lockdown anyway, saying it’s necessary to save a lot of lives and to limit the spread of the virus to areas where it will be difficult to control (hard to believe the government thought social distancing in townships would actually work, for instance).
- The private sector looks at this and asks themselves how this is going to be funded? Some ask for a 3rd party bail out, others warn about pensions being looted, but all admit that a funding mechanism is needed.
- Get famous, respected and very wealthy businessmen/businesses (Ruperts, Oppenheimers, Motsepe, Naspers)) to donate what seem like large sums, but aren’t nearly enough, to the cause (R5.5bn is not going to save 5 weeks’ worth of close to zero economic activity). Use this opportunity to set up a fund, the Solidarity Fund, whose purpose is to support efforts to fight and recover from the crisis (clever name as well — kudos for that one). Keep the fund independently run given the low trust in government’s ability to implement anything (truly pathetic that they had to do this, but good they did).
- Extend the lockdown, while at the same time announcing a personal 30% pay cut for 3 months. Strategic genius this. No doubt discussions had been had with large business leaders to follow .
- Most business leaders take public pressure to follow suit. They will, and some already have.
- Social pressure will then kick in, as ‘every rand counts’ — donations to the Fund will come thick and fast; South Africa comes together in this time of crisis to help those most affected and save the economy together (I personally would have the Fund recognise donors in some way, even a digital badge of some sort — give the people the status upgrade for being good citizens). I wouldn’t be surprised if competitions start up between certain groups to see who can raise the most for the Fund . Competition drives results after all.
- And so the Solidarity Fund (and other relief entities) gets the money it needs to support the economy. How much will they get? Not too difficult to see it getting to R50bn (1% of GDP). It’ll be 95% funded from private citizens, essentially a voluntary progressive tax on those with the means to donate what they can (more you have the more you can donate). The government could never have implemented something like this by force. They would have been accused of stealing. Very well played. Genius.
I applaud Cyril and team for the way they have handled this, but do worry about the sudden single minded trust being placed in the government. Civil liberties have been taken away overnight with no questions asked (this step may well have been necessary, but you are more likely to be shouted down for asking questions about it than have the discussion encouraged). National leadership is definitely needed to tackle a problem that is beyond individual control. However, it is the strangest turnaround in trust from a public that just a few months ago refused to say a single good thing about the government. There was even a growing chorus for a tax revolt. What does this say about the quality of engagement in South Africa’s future if we’ll vacillate between extremes like this with no interest in the tough discussion about the middle ground?
Let’s hope as the optimists now say, that this trust gain will give Cyril the power to rid the leadership in government of the bad apples, push through more capitalist policies and drive the country forward to where it needs to go (let’s also hope Eskom’s maintenance has zoomed ahead during lockdown). I hope like everyone else, but am not so sure. The ANC’s mandate will not change overnight, and I worry about additional government powers slipping into law under the guise of the national emergency. I hope not, but if history has shown us anything, it’s that governments do never waste a crisis.
*Mr Mboweni has since indicated that any 3rd party loans that are conditional on controls being put in place are off the table.