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South African Rand: 50% Unemployment Now Possible says Investec as they Slash GDP Forecasts for 2020, Citing Harsh Lockdown

- SA's strict coronavirus lockdown continues
- Half of SA businesses might go under
- Investec says defaults could soon snowball
- Half of the population could be out of work by end-2020

Lockdown in South Africa

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The outlook for the South African economy has deteriorated to the extent that up to 50% of the working population could find itself unemployed and 54% of businesses might no longer exist by year-end unless the government opens up the economy, according to analysis from Investec.

The corporate lender and investment bank has updated clients with its latest economic predictions for the South African economy, and warns that unless the severe lockdown is lifted soon an economic collapse could occur owing to a cascade of household and corporate defaults.

Investec says the alarming deterioration in the economic outlook is due to the ongoing lockdown, which has proven to be one of the most restrictive in the world and hits an economy that was already teetering on the brink of contraction before the coronavirus outbreak.

"The extreme lockdown we have seen on the South African economy will drive a deep and severe recession in South Africa. We estimate that will now be well in excess of around the -5.0% y/y we estimated in April," says Annabel Bishop, Economist at Investec in Johannesburg.

When Bishop and her team made their previous set of forecasts in April there was an assumption that the South African government would usher the country out of the lockdown process at a quicker pace than has transpired.

South Africa is now 48 days into lockdown, with restrictions only having been eased slightly 12 days ago when the country was moved into Phase 4 of the lockdown. President Cyril Ramaphosa has not addressed the nation about government's response to the Covid-19 pandemic in nearly three weeks.

With deaths and infections still rising and showing no signs of plateauing the prospect of any material easing of the lockdown looks to be remote.

The lockdown will meanwhile continue to exact an excruciating toll on the economy, with Investec saying a GDP contraction of above 10% year-on-year for 2020 is now quite possible on a lengthy, severe lockdown at the high levels of 4 or 5 for most of the second quarter of 2020.

Investec warns the strict controls will lead many corporates to not only temporarily cease activity, but do so permanently.

"This would clearly also suppress the anticipated recovery in the economy in Q3.20 due to these corporate failures," says Bishop.

Investec's economists are now looking for the scale of the economic contraction in the second quarter to be closer to -65%, which would imply a GDP decline of 14.0% for 2020.

The impact will be worse, "without a quicker opening up as the economy is only at level 4 lockdown and we are approaching the halfway mark of the second quarter," says Bishop.

54% Of businesses surveyed by Statistics SA in the first two weeks of April already said they will cease to exist before mid-July if they cannot generate sufficient turnover.

"Most businesses will have lost incomes needed to pay staff and other costs, resulting in retrenchments rising substantially and firms shutting down permanently," says Bishop.

The economist says there is a real risk that the South African economy enters a spiral of accelerated decline as households and corporates run out of savings and run up debt.

"The collapse will become bigger as it feeds off itself," says Bishop.

Unemployment is meanwhile forecast to rise towards 50% the longer the severe lockdown lasts, and Bishop warns it will become increasingly likely that jobs will no longer exist when lockdown ends due to firm closures.

The prospect of a material recovery in the value of the South African Rand meanwhile becomes less likely as the economy contracts and loses its structural integrity.

ZAR has fallen by 17% against the Pound in 2020, 24% against the Dollar and 20% against the Euro as capital takes flight from emerging markets amidst the coronavirus economic meltdown.

However, against its fellow emerging market brethren we note the South African currency is an underperformer, with losses being registered against all Asian currencies, the Turkish Lira and Mexican Peso.

This suggests there is a certain element of SA-specific risk at play, which is understandable as the South African economy was already flirting in recessionary territory ahead of the coronavirus crisis.

It now seems that the crisis will only exacerbate South Africa's already-weak fundamentals, ensuring the Rand is a particularly unattractive prospect whose recovery potential will be severely limited by the structural damage being wrought by the harsh coronavirus lockdown.

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