South Africa rushes to stop third wave of Covid as economic outlook improves

South Africa rushes to stop third wave of Covid as economic outlook improves

A healthcare worker holds a vile containing a Pfizer vaccine to be administered to the elderly at Bertha Gxowa Hospital in Germiston on May 17, 2021.

Michele Spatari | AFP | Getty Images

South Africa’s economic activity has rebounded faster than expected in recent months and the rand is the best performing emerging market currency this year, but the country rushes to roll out Covid-19 vaccines as third wave looms.

In its financial stability review on Thursday, the Reserve Bank of South Africa said the economy continued to rebound after a 2020 recession that saw gross domestic product contract by 7%, its biggest drop in over of a century.

“Positive data releases, rising global economic activity, robust international trade, high commodity prices and improved mobility” have led NKC African Economics to upgrade its GDP forecast for the first quarter to a quarterly expansion of 1.4%, against a previous forecast of 3.3% contraction. NKC analysts now forecast 3.1% GDP growth in 2021.

The industrial sector, especially mining and manufacturing, has shown positive growth rates due to increased global demand and high commodity prices

“Google Mobility data, which has proven to be a good indicator of economic activity, has improved to its best levels since the shock of the coronavirus,” NKC senior economist Pieter du Preez said in a statement. note Wednesday.

Risks of the third wave

The major rating agencies have all reaffirmed their ratings for South Africa over the past week, but Fitch noted that although the fiscal accounts have surprised on the upside in both Q4 2020 and Q1 2021 , the country still faces “substantial risks to debt stabilization.”

S&P also highlighted structural complaints, lack of economic reforms and a slow vaccination campaign as obstacles to medium-term growth potential.

Despite the positive surprises so far, the SARB has warned that the outlook remains heavily dependent on the pace of vaccine deployment and the possible resurgence of the virus, suggesting the pandemic could last until 2022.

To date, the country has reported a total of more than 1.6 million Covid cases and more than 56,000 deaths, according to data compiled by Johns Hopkins University.

Today, the seven-day moving average of daily new cases in South Africa is rising from its low of around 780 in early April to more than 3,700 at the end of last week.

Given the magnitude of the previous impact on economic activity, the government appears reluctant to reimpose strict restrictions on viruses, although President Cyril Ramaphosa met with the country’s coronavirus task force this week to discuss the possible strategies.

South African President Cyril Ramaphosa visits the coronavirus disease (COVID-19) treatment facilities at the NASREC Expo Center in Johannesburg, South Africa, April 24, 2020.

Jerome Delay | Reuters

South Africa has started working to meet its goal of vaccinating 5 million older people by the end of June and 67% of its population of 60 million by February. The country purchased 30 million doses of the Pfizer-BioNTech inoculation and ordered 31 million doses of the Johnson & Johnson vaccine, both of which were found to be effective against the dominant variant circulating in the country.

The central bank also noted the risks posed by a sudden change in global financial conditions and the “still high and growing level of public debt” in South Africa.

NKC’s Du Preez said the impending third wave of Covid-19 would disrupt the process of economic recovery. Meanwhile, the government is embroiled in lengthy negotiations with unions over its pledge to freeze public sector wages, which Du Preez says is also negative for the economic outlook.

“The national treasury would either be forced to redefine spending priorities or over-spend an already large budget deficit,” he said.

“Redefining spending priorities would involve cutting funding to critical sectors of the economy or reducing essential infrastructure upgrades.”

The Treasury is therefore “between a rock and a hard place,” du Preez added, as overspending could send a signal that the authorities are not serious about fiscal consolidation.

Roaring Rand

Any sign of commitment to this austerity campaign would put pressure on the rand, Capital Economics senior emerging market economist Jason Tuvey said in a recent memo.

The rand soared on the rise in metal prices and was trading at around 13.76 per dollar on Monday morning.

However, analysts at Capital Economics said in a note Thursday that “the rand’s flagship performance is unlikely to last as we expect most commodity prices to retreat, and US long-term yields will start again. to rise, which will put further pressure on EM currencies. “

“In addition, we believe that the SARB will not tighten its policy as quickly as investors are now discounting it, and that concerns about South Africa’s fiscal position will eventually resurface.”

Capital Economics predicts the rand will weaken to around 15.5 per dollar by the end of the year.

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