The Director of the Institute of Social and Economic Research (ISER) at Rhodes, Prof Cyril Nhlanhla Mbatha, discusses the acquisition and roll-out of COVID-19 vaccines in South Africa and the impact on the South African economy.
Clarity on process and timing is critical
While the vaccination arrival and roll-out is very positive news for the country, in terms of health, social relations and the economy, it is something that must be carefully and transparently monitored and reported to build trust, as we hold government accountable.
For the economy to rebound, we need to vaccinate at least 10 million people in the shortest amount of time to move to the goal of population immunity. This requires 20 million doses of the two-dose vaccines. The important question that requires more clarity, is the time it will take to achieve this, as this has a critical impact on the time it will take for our economy to rebound.
Concerns on access and logistical challenges
The first 1 million doses of the AstraZeneca vaccines from India delivered will only cover 750,000 people, as two doses are required per person. The number of people to be vaccinated would be far below 1.5 million as initially discussed, unless further batch of vaccines come in asap.
14 days is a lot of time to audit and check 1,5 million doses that would only cover 750 000 people. would need 9 months just dedicated to auditing the required stock for 20 million doses? This is early indication of the logistical challenges that would face the public networks in distributing the vaccines to all provinces. Better planning and private sector partners are required to help, at least with the logistics.
Reaction of the financial markets to vaccine delivery
The delivery of vaccines should continue to boost investor confidence and markets can be expected to react positively. In the US, a shift from growth stocks to value stocks was reported in November when the vaccine roll-out started.
During the pandemic, growth stocks had far outperformed value stocks. Where growth stocks include entities like technology stocks, these stocks grow because of speculation that they will be important in the future, so we see demand for stocks in mostly digital economies.
However, after vaccines were developed, value stocks started making a comeback. Value stocks include entities that may have higher intrinsic value than fluctuating market prices indicate. These stocks include financial services, the energy sectors and real estate.
The good news about value stocks is that they have a bigger distributional impact on the economy. Positive results are more likely to be inclusive and affect more individuals. This is also true in terms of labour markets.
The impact of the start of vaccination on the economy and growth prospects
The pandemic has led to ongoing lockdowns, which means there are fewer transactions throughout the economy due to many sectors being shut down. People are simply not buying and selling as much, which decreases GDP. In the second and third quarters, the GDP was reported to have declined by 16%. An official estimation of a decline of R275 billion was estimated for 2020. That amounts to 20% of the total public sector annual budget.
These official calculations did not include the informal sector, which is not normally recorded in official GDP transactions. We know that these informal sectors have been the most negatively affected. So, the official estimations of GDP decline because of the pandemic have been understated.
Besides immediately building confidence for financial market investors in value stocks, an effective vaccination roll-out should help in reducing the impact of COVID-19, allowing for a gradual opening of the economy. More buying and selling of goods and services by consumers will again take place, which will lead to GDP growth, but it will take a long time to reach pre-pandemic levels.
Economic prospects dependent on government handling of vaccination roll-out
Getting back to levels of business transactions that were recorded before the pandemic may be a slow process and depends very much on how government handles the vaccination roll-out. It will depend on the effective administering and actual health effects of the vaccines as they affect consumer confidence in local investments – for example, the opening of small local businesses, as well as government spending to help these consumer decisions in the economy.
Effective logistics, transparency in sharing information about solid plans and detailed monitoring of progress and observed effects throughout the process is essential.
Reserve bank balancing act
The Reserve Bank has been trying to stimulate local economic activity by maintaining low interest rates and making sure that it is cheaper for South Africans to do business.
Their reaction to developments is key. As the economy starts picking up, the Bank is likely to start thinking of increasing rates, especially with increasing inflation figures from consumer activities. But they would have to be so careful, and not be too bullish in anticipating the overall effects of the rate on increasing aggregate demand. If the rate is increased too fast, that might backfire and keep our GDP levels arrested at lower levels as consumers and local investors become cautious again. It is such a delicate balancing act.
Growth prospects going forward
We might observe GDP growth in 2021, but because the 2020 GDP decline was so steep from the pandemic, the expected 2021 growth will not put us back to the pre-pandemic levels of 2019. Because the lockdown effects were so deep, some of the sectors and jobs lost will never be regained. Those businesses have closed down permanently. Completely new businesses have to develop for South Africa to get back to 2019 levels. So, the negative effects are cumulative from year to year – our unemployment rate is likely to remain high, even as the economy is growing.
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