WRAP | Treasury seeks $60 million from World Bank to fight coronavirus

The Covid-19 pandemic is expected to deepen South Africa's economic woes, and is expected to push the economy into a deep recession during 2020.

Finance Minister Tito Mboweni has said that Treasury will have to revise the national budget across the board to ensure that the Department of Health has the resources necessary to respond to the outbreak.

Treasury has also been in talks with foreign lenders, including the World Bank, the New Development Bank and the African Development Bank on possible loan facilities- strictly to be used for Covid-19 support. According to Mboweni a facility of $60 million is being considered from the World Bank. The finance minister said that Treasury is considering all options available and will leave no stone unturned in this regard.

While Treasury has also introduced tax relief measures, Mboweni noted that a downturn in tax revenue is also expected due to reduced economic activity.

Treasury will brief Cabinet on Wednesday, on a set of proposals to revive the economy.

When asked if Treasury is considering a basic income grant as part of its efforts to tackle the impact of Covid-19, Mboweni said that no decision has been taken yet to introduce one.

Mboweni said the country is open-minded to resource mobilization from all financial institutions. This includes the World Bank, New Development Bank.

It will be seeking assistance from the IMF for Covid-19 not for budget support.

"We are talking to them about it. We are looking for programmes not accompanied by any structural reform programmes," he said.

"This is an international resource moblisation in addition to our domestic resources," said Mboweni.

The support being sought from the World Bank is $60 million.

Mboweni confirmed that budget revisions will be introduced to ensure that the department of health has sufficient funding to implement its interventions. Mboweni said on basis of current plans and forecasts, Treasury may have to reallocate budgets towards fighting the virus, containing the virus. All things which might not be urgent may have to wait. "We must be careful not to take too many resources away from growth-enhancing initiatives," he said. These revisions will be made available once given the "go-ahead" from Cabinet.

In terms of public wages - the public wages bargaining council is still considering the proposal. Negotiations are still continuing. No decisions have yet been made.

Mboweni says Treasury is in conversations with most financial institutions for possible lending facilities.

Treasury spoke to the World Bank today, and has been considering facilities from the NDB, African Development Bank.

Mboweni said Treasury will leave no stone unturned in terms of evaluating different financing options.

Mboweni said more clarity on the proposed closure on SAA and SA Express would likely be provided following the Cabinet briefing tomorrow.

Mboweni says some economic measures were in place before the crisis, and will be ramped up. 

Among Treasury's fiscal responses to Covid-19 include:

1. Putting forward clear estimates of the additional health care costs that will be needed

2. Reprioritising unnecessary expenditure towards these health care costs

3. The impact of slowdown on our projections for revenue

4. It should be costed as much as possible (how much is needed?);

5. It should be temporary (clear timeline of 1 year);

6. It must be crafted as a 3rd line of defence for the vulnerable

7. A clear timetable or plan to stabilize debt over the current forecast period

8. Supported by an economic recovery plan (structural reforms) and a set of reforms within the fiscal system e.g. passing the RABS (road accident benefit scheme), consolidation of public entities and closure of SAA and SAX

Mboweni says some of these proposals have been mentioned in the past, and others are new.

Mboweni says Treasury will present to Cabinet proposals to revive the economy tomorrow. 

Mboweni: Despite historic levels of volatility, the National Treasury has continued borrowing in the domestic market, albeit at record high yields. Due to Treasury’s prudent long-term borrowing strategy, these higher yields will only slowly feed through into higher borrowing costs. In addition, government has significant cash buffers available. These can be deployed should there be a significant prolonged disruption in markets.

Mboweni: As a small open economy we regularly experience external shocks. For this reason, we have chosen a flexible exchange rate, and monetary policy that is anchored by an inflation target.This approach has served us well in the past, through many crises, and it is serving us well at present.

Mboweni: Our economy is also highly dependent on services, particularly tourism. These will be affected by the global travel ban.

Mboweni: Every crisis is an opportunity for us to address our problems and challenges.

Mboweni: The Reserve Bank projects that GDP is expected to grow by 2.2% in 2021 and by 2.7% in 2022.

Mboweni: The International Monetary Fund’s April 2020 World Economic Outlook will be released later today. Current estimates from the IMF show global growth contracting this year by about 2.9%. For South Africa, their initial estimate was for an economic contraction of 5.8%. Other estimates vary.

Mboweni: SA's economy will shrink less than other emerging markets, mainly because it is not a net oil exporter.

Mboweni: The forecasts we have been receiving so far vary from the optimistic to the deeply pessimistic.

Mboweni: There was a spike in activity in food (and alcohol) sales prior to the lockdown, and in the first weekend of the lockdown, but these have now settled. In addition, there was large ATM activity in the first weekend, but now things have normalised.

Mboweni: The governor of the Reserve Bank and myself probably speak four times a day.

Mboweni: At this stage, our central scenario is for a deep recession in 2020, followed by a rapid upswing in economic growth

Mboweni: Covid-19 will certainly further deepen the South African downturn woes.

Mboweni: Our economic response will be data-dependent, and we will evaluate and update our response on a continuous basis.

Mboweni: The health of our people, and their lives, must come first. But we must also ensure that we protect their livelihoods.

Mboweni: President Ramaphosa has extended the lockdown by a further two weeks until the end of April. We continue to reiterate pleas calling on all South Africans to stay at home unless it is necessary for them to be outside.

Mboweni: It is increasingly clear that, led by our President, we have chosen the right path.

Mboweni said the Covid-19 crisis is both a health shock and an economic shock.

Shortly before Treasury's teleconference, the Reserve Bank announced a 100 basis point slash in the interest rate to 4.25%.

The rand reacted negatively, weakening 1% to the R18.20/$ level, after trading around R18/$ earlier on Tuesday, Bianca Botes, executive director at Peregrine Treasury Solutions noted.

   

The rand has reached record lows following the downgrade by Moody's on 26 March 2020 to junk status. Up until then, Moody's was the only rating's agency which had the credit rating at investment grade.

The rand plummeted nearly 5% following the Moody's downgrade.

Just days later, Fitch downgraded the country's credit rating further into junk status. This saw the rand breach the R19/$ mark.

The currency has lost nearly 40% of its value over the past year, which has implications for the cost of imports such as oil, electronic goods and even foods.

So far the Reserve Bank has projected that the 21-day lockdown would see the economy contract by as much as 4%, and that there might be as many as 370 000 job losses.

However the lockdown has since been extended to the end of April, with some economists indicating that the country would experience a deep recession.

Finance Minister Tito Mboweni, and National Treasury is set to hold a briefing via teleconference t 12:00, on the recent announcements by Moody's and Fitch to downgrade South Africa's sovereign credit ratings.

Treasury will also provide insight on recent interventions to limit the economic impact of the Covid-19 outbreak.