What Happened

With an economic crisis looming ever larger due to COVID-19, South African President Cyril Ramaphosa unveiled a 500 billion rand ($26 billion) stimulus package to help relieve the growing number of households struggling to make ends meet under quarantine. The plan, which was unveiled on April 21, includes 200 billion rand ($10.5 billion) in loan guarantees, 50 billion rand ($2.6 billion) in various welfare grants, 50 billion rand ($2.6 billion) for creating and protecting jobs, and 70 billion rand ($3.7 billion) in temporary tax relief.  But while intended to mitigate the short-term economic impact of South Africa’s COVID-19 crisis, the new stimulus plan will come at the cost of the country’s long-term financial sustainability, as more than half of the new measures lack clarity over where the funds will come from. 

Economic Risks

South Africa is currently battling the largest COVID-19 outbreak in sub-Saharan Africa. In response, the government has implemented one of the world’s strictest nationalist lockdowns, which expires at the end of April, for fear that a large breakout could quickly overwhelm the country’s already strained health care system. The widespread closure of business activity, however, has hit the country’s already fragile economy hard. South Africa's central bank now expects the country's economy to contract by 6.1 percent this year, with the International Monetary Fund (IMF) forecasting another 5.8 percent contraction in 2021.

Prior to the breakout of COVID-19, South Africa had been trying to curtail public spending to make its fiscal deficit and overall public debt more sustainable in the coming years. In doing so, Ramaphosa had hoped to avoid an IMF bailout or any other rescue plan that was contingent on the implementation of unpopular structural economic reforms. But his new stimulus plan, which is already earmarking 40 billion rand ($2.1 billion) from international finance institutions for income support, will dash these hopes. 

Pretoria has about $4.2 billion that it can draw on from the IMF, and has also pulled the plug on some of its budgeted spending this year in order to finance some of the stimulus measures. Paying for the rest of the economic program, however — which totals 10 percent of South Africa’s GDP — will ultimately force the government to turn to debt markets. 

South Africa’s budget deficit was already expected to approach 15 percent this year, and the IMF is now expecting double-digit deficits for 2021 as well. This means that South Africa’s debt-to-GDP ratio could rise to near 90 percent by the end of 2022, depending on how much tax revenue declines and how much more stimulus is needed. In October, the government estimated that its debt-to-GDP-ratio would be 57.8 percent by the current fiscal year (which it upped to 65.6 in February). As a result, any attempt to reach a more sustainable budget by the mid-2020s will now require Pretoria to implement significant austerity measures once the current COVID-19 crisis ends, thus prolonging South Africa’s economic malaise. 

Political Risks

Amid the COVID-19 crisis, Ramaphosa has faced increased pressure to implement more socially-oriented measures to mitigate the financial impact on manual laborers and impoverished communities, who have been hit particularly hard by the nationwide shutdown of business activity. The recently announced stimulus program will help relieve some of this pressure. Indeed, the country's powerful Congress of South African Trade Unions (COSATU) — which had been critical of the government’s recent economic policies, such as attempts earlier this year to curb public wages due to the government’s fiscal constraints — has come out in support of the new stimulus plan, as well as the use of IMF and World Bank funds to help pay for it. But finding the funds for the expensive new measures, combined with South Africa’s pandemic-induced economic crisis, will ultimately exacerbate the contentious political debate over Pretoria's economic policies as well.