Shutdown: How Covid Shook the World's Economy

by Adam Tooze

South Africa was even more vulnerable than Brazil. Its growth record was worse. Even before the 2020 crisis, unemployment was close to 30 percent. South Africa’s export potential was less dynamic than that of its Latin American counterparts. As the South African Reserve Bank admitted, the quantity of domestic public debt held by South Africa’s banks and pension funds created a dangerous link between public and private balance sheets.72 A downgrade of sovereign debt would hit the balance sheets of banks and pension funds. And the same logic operated in reverse. The South Africa government had backstopped the bonds of its bankrupt power utility Eskom.73 If those guarantees were called, it would raise South Africa’s public debt at a stroke from 2.62 trillion to close to 3 trillion rand. But South Africa had mastered the new EM toolkit. Though the public debts were substantial, they were not yet at worrying levels. The exchange rate fell in early 2020 but then rebounded. By the end of 2020, South Africa’s foreign exchange reserves were larger than they had been at the beginning of the year. Given the depressed state of the economy, the South African Reserve Bank held its line. It would not raise rates until absolutely necessary.