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  • Writer's pictureLisa Perry

No 1. Covid-19 and the Downgrade

The curve is flattening (for now); but are we out of the woods yet, No. The biggest threat we have as per President Ramaphosa’s speech on Sunday, 31 March, is the amount of people currently diagnosed with HIV/ Aid and TB who most likely will need to be admitted to hospitals, thus placing an extreme amount of pressure on our healthcare system. It’s important to note, that other reasons for hospitalisation have not evaporated.

SA currently has 7.7 million people living with HIV; We have a population of 58.8mil people meaning that we have 0.02 beds per 1000 people available should our entire HIV population be infected with the Covid 19 virus and require ALL the available hospital beds. Assuming South Africa is able to add hospital beds specifically for this virus, one would then need to calculate the number of qualified doctors and nurses available to provide care for the sick. This is not practical by any stretch of the imagination.

The next question which I am sure most people know the answer to is how long is the incubation period?

According the World Health Organisation’s website 1 – 14 days. Assuming that the virus was flown in through different part of the world, we assume it has infected the “affluent” who live in urban areas. These “urban” folk have been in contact with MANY people knowingly or not and could have passed on the virus quite easily. We are into day 8 (when this was written) of the virus meaning that we still have another 6 days minimum for the numbers to rise. The lockdown is about reducing the number of infections as opposed to eradicating the virus, which I believe can only be done through antibiotics and vaccines, where there are currently none of.

What is the impact of Covid 19 on the economy and what are the forecasts?

In simple language the growth expected in the second quarter of -5.8, is not a shock as logic tells us that. IF we are all able to go back to work after the 21 days, it will take time for the economy to recover from the loss of income over the past month. What is fairly uplifting is that from the 3rd quarter we should see positive growth going forward.

(I might throw in a warning here, the above is purely done on factual information and calculations and DO NOT take into account the “what if’s”)

The sceptics may ask, is this possible? Well Yes, would be the easy answer due to current government and banking stimulus being poured into businesses.

Let’s assume that we are on lockdown for longer than the 21 days or social distancing persists for months. South Africa would then enter into a technical, and fairly obviously realistic recession (how to prepare for a recession is addressed in the last topic (no 3).

Let’s bring in the downgrade and the reason’s it has hit us harder than we would have liked. Most say that the downgrade was already “Priced in” meaning discretionary mangers would have exited South African Bonds in the lead up to Moody’s pulling the plug. HOWEVER an est of 38% of world funds are invested in Passive Strategies, which include index funds and exchange traded funds these funds do not have discretion and therefore “track the index”. They are rebalanced generally on a quarterly basis. Thus we are expecting another large sell off of the SA Bond Market over the next month as most of the global passive strategies will be rebalancing by the end of April 2020.

This is done on a willing buyer and willing seller exchange. As we painted the picture on the effect of the Covid Virus on the South African economy the question is Who wants to own South African Debt when the growth rate is expected to be negative, this means we are limited in the buyer counter-party space. Should Covid 19 not have existed, it would have been a fairly easy ride to sell out of South Africa and investors with credit risk discretion would be lapping up our local credit, we would have had, regardless of the Covid Virus, a run on the rand forcing a sell off. In essence, foreign global investors would have gotten cheap bonds off a cheap rand/ currency. However, the short term ramification of Covid bring around addition risk, with slowed/no/negative growth will bond issuers be able to honor their commitments.

In summary, the message is STAY AT HOME, the quicker we get the economy up and running the quicker we move through the inevitable recession.

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