Awakening the economy from COVID-induced coma


Soria Hay | Head | Corporate Finance | Bravura | mail me  |

President Cyril Ramaphosa presented the five-level, risk-adjusted strategy that will guide South Africa’s emergence from lockdown. As the finer points of the strategy were shared, it became clearer how – and when – certain sectors will once again gear up into activity.

In this environment, Ramaphosa’s R500 billion extraordinary COVID-19 budget will have to act as a strong bulwark against the potential systemic failure of South Africa’s economy. 

I outline the key aspects of President Cyril Ramaphosa’s R500 billion extraordinary COVID-19 budget that seeks to guide South Africa’s ‘new economy’ on the road to recovery as the post-lockdown risk-adjusted strategy kicks in.

The massive social relief and economic support package, which amounts to 10% of GDP, will include the reprioritisation of R130 billion from within the current fiscal budget.

The remaining funds will be sourced both locally and internationally, including tapping the World Bank, the International Monetary Fund, the BRICS New Development Bank and the African Development Bank. National Treasury is currently in discussion with all four of these institutions on various funding transactions.

R100 billion for job security and creation

An additional R100 billion is to be set aside for the protection and creation of jobs which will form part of the previous measures put in place by government when the State of Disaster was first declared.

Economists predict around one million job losses in the formal sector in South Africa as a result of COVID-19. Before the outbreak of the pandemic statistics indicated that over six million South Africans were unemployed in the last quarter of 2019 (without counting those who have given up on trying to find a job altogether).

The UIF’s COVID-19 benefit has already paid out R1.6 billion to 37,000 businesses and 600,000 workers.

A further R40 billion will go towards income support payments for workers whose employers are unable to pay their wages, and a further R2 billion will be made available to small businesses, including SMEs and spaza shops.

R200 billion loan guarantee facility for companies

A partnership between National Treasury, the South African Reserve Bank and major commercial banks will see the establishment of a R200 billion loan guarantee facility to assist companies with operational costs (such as salaries, rentals and supplier payments) that will enable them to continue operating during and beyond the lockdown.

Banks will begin rolling out the facility in a phased approach at the end of April, with the first phase prioritising smaller companies that have an annual turnover of less than R300 million.

It is anticipated that the facility will support 700,000 companies and more than three million employees.

The loan guarantee facility is in addition to the current economic relief that certain commercial banks and insurance companies have already offered to their customers, which includes delaying or reducing instalment payments, providing debt relief and waiving bank fees.

Although the details of the loan guarantee facility are yet to be clarified by the Reserve Bank, Business Day reported that it will likely see banks borrow from the Reserve Bank’s R200 billion loan guarantee scheme at the current repo rate of 4.25% or below, for specific lending to businesses at rates as low as prime minus 175 basis points, or an interest rate of 6% per annum.

A separate R32 billion loan guarantee fund will be backed by government in order to absorb losses incurred by commercial banks on loan defaults.

Deeper tax relief measures

Tax relief measures are being ramped up beyond those announced in late March. Previous tax measures had included the introduction of a tax subsidy (the Employment Tax Incentive) to employers, of up to R500 per month for each of certain selected employees over the next four months (qualifying employees include private sector employees earning below R6,500 per month).

It also included the acceleration in the payment of employment tax incentive reimbursements from twice a year to monthly.

For tax compliant companies with a turnover of R50 million or less, a four-month delay of 20% of their monthly employee tax liability (PAYE) and the delay of a portion of provisional corporate income tax payments, without penalties or interest, over the next six months, were previously announced.

President Ramaphosa announced that the tax deferrals will now be available to all tax compliant companies with a turnover of R100 million or less per year, and there will be an increase of the portion of PAYE payments that can be deferred to 35% of the monthly employee tax liability.

Businesses with a turnover of more than R100 million per annum will be able to apply directly to SARS on a case-by-case basis for deferrals of their tax payments. Should these companies be able to illustrate a negative material impact as a result of the Lockdown, there will be no penalty for late payments.

The other measures announced by President Ramaphosa also include a four-month holiday for companies’ skills development levy (SDL); the fast-tracking of VAT refunds; a three-month delay for carbon tax filing; and a delay in the first payment of the new carbon tax.

Taxpayers who donate to the Solidarity Fund will be able to claim a deduction of up to 10% on their taxable income.

It is anticipated that the new tax measures will ultimately provide upwards of R70 billion in cash flow relief or direct payments to businesses and individuals.

Re-opening the economy

President Ramaphosa stated that the strategy for South Africa’s emergence from Lockdown must be agile and flexible, in order to relax or tighten in different periods as determined by the COVID-19 progression: ‘We will therefore follow a phased approach, guided by the best available scientific evidence, to gradually lift the restrictions on economic activity.’

As the Reserve Bank noted in its April 2020 Monetary Policy Review, ‘The Covid-19 shock has put large portions of the economy into a policy-induced coma.’

To awaken sectors from this ‘coma’ – without disrupting the carefully managed curve of COVID-19 infections – will require a risk-adjusted approach.

Despite enduring five weeks of Lockdown, it is clear that for South Africans the long haul is just beginning. As Ramaphosa noted in his speech last night, ‘There are times when we must endure hardship and difficulty, so that we can enjoy freedom and prosperity into the future.’



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