By: Sanisha Packirisamy, Economist at Momentum Investments
While financial markets had their share of ups and downs in 2019, the year concluded with a revival in risk appetite on marked progress in trade negotiations, a resolution reached in a tense British political standoff, and a steadfast resolve by global central banks to maintain an accommodative stance. The international community was, however, mostly unprepared for the COVID-19 pandemic, which shook the steadier foundation on which the world entered 2020.
The COVID-19 pandemic has inflicted high human costs worldwide with the United Nations (UN) calling this the largest global health crisis in its 75-year history. Facing an impending global recession, policymakers rushed forward with large-scale stimulus measures which calmed volatility in financial markets. Nevertheless, the jury is still out on the effectiveness of these measures in lifting the world economy out of recession.
The hangover from the COVID-19 pandemic is likely to be particularly damaging to the more vulnerable communities and threatens to raise heightened levels of socio-economic inequality. Government’s approach to social distancing may prove less effective in many developing countries braving weaker healthcare systems, overcrowded informal settlements, inadequate border controls, a high reliance on public transportation systems and a lack of clean water.
Containment measures to manage the projected outbreaks in these economies must also be balanced against the unintended effects of suppression strategies in countries without a developed social safety net, such as higher levels of starvation and a rise in untreated diseases as lockdowns divert resources and attention to COVID-19. The ferocity of the COVID-19 pandemic threatens progress in poorer countries. It could lead to fresh policy uncertainty in countries with weak political mandates or could entrench autocracy in countries with unguarded democratic institutions.
While emergency policies were initially aimed at reducing the societal threat, questions have emerged over how these will be reversed without stoking socio-political instability, given the negative political consequences of pulling the plug on increased welfare benefits.
The rise in interdependency among nations as a consequence of increased connectedness suggests more frequent systemic risks if left unmanaged. While it is not possible to avoid similar global threats in future, transboundary crises can spur multilateral co-operation and create an opportunity to undertake joint actions to dampen economic repercussions and ameliorate transnational challenges. With significant pressure building on government finances globally, public-private partnerships, particularly in infrastructure, health and education, are critical in sustaining longer-term growth and social development.
The crisis also created an opportunity to study the strengths and vulnerabilities of institutional rules and proposes fundamental changes to bureaucratic structures in some governments and the need for political accountability in others to restore faith between leaders and their citizens.
South Africa (SA) entered the COVID-19 pandemic with a government debt ratio in above 60% and a paltry growth average of 0.8% for the past five years.
At the outset of the crisis, government garnered a great deal of political goodwill by taking decisive action early on given the poor state of the public healthcare system and SA’s demographic health risks. However, a battered global economy and moribund local activity, even before COVID-19, imply that it will take years for the economy to reach growth levels attained at the end of 2019, particularly in a fiscally constrained environment.
As the restriction on the movement of people and activities wears on, many small and medium enterprises, particularly those in the informal and services-related sectors, will face financial difficulty and be forced to retrench workers or even shut down. An expected unparalleled economic contraction and the loss of jobs will bear negatively on tax revenue at a time when SA’s cost of borrowing has increased due to its perceived reduction in credit quality. This is likely to spur the debate for many previously resisted policy choices.
There is still a road out of a potential debt trap for SA, but this involves reskilling workers in an age of automation, improving educational outcomes, eradicating corruption and improving the operational and financial standing of our parastatals. In this lower growth world, civil society and SA’s democratic institutions will be forced to play an active role in overseeing policy choices and holding government accountable.
It is in times like these that we remain deeply anchored in our outcome-based investing philosophy and process, where we are unwavering in our belief that a well-constructed diversified portfolio is the most efficient way to achieve the long-term investment outcomes for our clients. In uncertain and volatile market environments, we continue to vigilantly manage the risk in our portfolios and look for opportunities to harness the available opportunity set towards achieving our long-term investment goals.