The domestic GDP recovery from the 2020 crash was dealt another hefty blow last week, with the ramifications to be felt by most South Africans in the coming months say economists at the Bureau for Economic Research (BER).
Along with the Covid-19 third wave and the associated harsher lockdown restrictions, the shock events of the past week will put significant strain on economic activity at the start of the third quarter, the group said in a research note on Monday (19 July). GDP is now set for a large contraction in Q3 2021, it said.
The group outlined some of the other ways that the economy has been and will be affected going forward.
Household consumption and production
The most immediate and direct impact on GDP will be the loss of household consumption and industrial production in KZN and, to a lesser extent, Gauteng over the past week.
Many businesses across different sectors in both the formal and informal parts of the economy were forced to close to ensure the safety of their employees and customers.
Some retail chains also temporarily closed their facilities outside the directly affected areas as a precaution.
“While unaffected businesses should be able to reopen relatively quickly once the dust has settled, the shock of the past week may weigh on consumer and business confidence for some time, potentially negatively impacting consumer and firm spending behaviour,” the BER said.
More worrying is the outlook for businesses directly affected by the looting and the extent of the longer-term damage to production capacity, infrastructure and other facilities, the BER said.
In many cases it is not ‘only’ cleaning up and restocking that is required, but rebuilding entire facilities after arson and other destruction took place.
The SA Property Owners Association (Sapoa) estimates that about 800 of their stores have been looted and/or severely damaged while 100 malls have sustained significant fire damage.
Sapoa said that the rebuilding of malls that burned down completely could take at least two years, while businesses sustaining structural damages will also be closed for months.
Thousands of people who were employed at affected businesses are now also left jobless, with little opportunity to find a job elsewhere.
The primary short-term insurer in SA that provides cover against risks such as civil unrest and public disorder, Sasria, is still assessing the damage.
Some reports from the insurer put an initial estimate of the damage at R12 billion, while it has also commented that it could cover claims up to R10 billion from its own balance sheet.
“Without delving into the intricacies of insurance claims, even successful claims may take some time to be paid out, which further delays the rebuilding.
“Furthermore, some businesses may decide not to reopen at all. Outside of the private sector, rebuilding of damaged public sector facilities will put further pressure on already strained provincial and municipal budgets.”
Supply chains within South Africa are significantly distorted, and even trade with the rest of the world has been negatively impacted as harbour activity in Durban and Richard’s Bay came to a virtual halt last week.
The N3 highway between Durban and Johannesburg was closed for almost a week and transport on the Natcor freight rail line linking KZN and Gauteng was halted
“While the reopening of the N3 and a restart of some factories should help, the destruction of some production and distribution facilities and warehouses means that it will take some time before normality returns.”
The disruption of supply chains and temporary closures of key production facilities as well as panic buying has led to shortages of food, fuel and even medicine in some parts of the country.
While South Africa’s agricultural production is not concentrated in one province and overall production capacity should be sufficient to meet South Africa’s needs, KZN does serve as a key entry point for many imported food products and Gauteng is a key centre for agri-processing, the BER said.
“The risk of temporary higher prices and shortages of some key products remains.
“The temporary, precautionary closure of South Africa’s largest petroleum refinery, Sapref, and scheduled delivery disruptions have led to fuel running out in some parts of KZN and Gauteng.
“Again, on a national level, South Africa’s fuel supply should remain sufficient and local shortages should also be replenished relatively quickly.
“However, localised shortages contribute to supply-chain disruptions and hamper the distribution of other goods.”
Covid-19 and medicine
Many of the looting activities could turn out to be Covid-19 super-spreader events, the BER said.
It warned that the vaccination rollout in KZN in particular experienced a setback over the past week as many sites were forced to close.
“For example, during one 24-hour cycle last week, private sites in KZN administered only four vaccines.”
Many medicine warehouses and distributors were looted, including Cipla’s manufacturing plant in Durban.
“Bhekisisa estimates that chronic medicine, such as insulin and antiretroviral drugs, for almost half of KZN’s chronic patients, has been stolen during the looting,” the BER said.
Consumer and business confidence
While the looting and violence were largely isolated to just KZN and Gauteng, it will depress consumer and business confidence across South Africa.
This could have negative implications for consumer spending as well as capital expenditure outlays, the BER said,
“The adverse impact on especially private sector fixed investment could last well beyond the initial shock to the economy last week.
“While the third wave would have been a setback to confidence, with the vaccination rollout finally gathering steam and even some long-awaited progress on the structural reform front, confidence may have been on the mend before last week.”
Brand South Africa
Last week’s protests received plenty of international media attention and stand to hurt South Africa’s image as an attractive investment destination and ‘gateway to Africa’.
Beyond the short-term impact on financial markets, with the rand initially sliding significantly last week, this could hurt foreign direct investment flows as well as international tourism to South Africa, the BER said.