Wed, 08 Jul 2020

After an extensive lockdown to contain the spread of the coronavirus, South Africa is lifting some restrictions to revive and stabilise the economy.

Latest projections indicate that the economy could decline by over 7.1% in 2020, implying thousands of businesses will not reopen after the lockdown is lifted, partly due to low aggregate demand and decaying investments.

According to the World Economic Forum, nearly 40% of businesses across the world will not survive the Covid-19 pandemic, suggesting a looming rise in global unemployment and humanitarian calamity.

In South Africa, the Covid-19 crisis will have the severe impact on sectors such as tourism, mining, manufacturing and construction. The trade data for April 2020 released by the South African Revenue Service shows early signs of suffering in these sectors.

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In April, the country had a trade deficit of R35 billion, largely driven by a decline in mining, vehicles and precious metals and stones.

One of the few sectors that is showing a positive growth and would not be heavily affected when the economy finally opens up is agriculture. This is because it was allowed to continue operating during the shutdown and it has an inelastic demand.

Agriculture is coming from an advantageous position of being an essential service under lockdown; however, the demand side of food has been affected by a collapse of informal food trading, hospitality and closure of fast-food outlets during the hard lockdown.

Opportunities in a changing food market

The Covid-19 crisis has not only affected food demand levels, it has also created a new patten in food purchasing, influenced by social distancing and the emergence of multifunctional homes.

As people modify their houses to allow working and exercising at home, they are changing their behavior, which subsequently alters the type of food demanded, the packaging and manner in which food is distributed.

Consumers are increasingly demanding fresh, healthy and locally produced food directly from a farm or processor. The direct connection between a farmer and consumer is facilitated by technology innovations which enables online food trading.

The expanding e-commerce has a potential to create a new cohort of domestic food processors and distributors thus presenting new opportunities to reshape the food system in the country. It is promising to break entry-barriers in the food market for new players, especially the youth and women, who were previously unable to secure market contracts to supply large and centrally organised supermarkets.

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The growing online food market is resetting the traditional flow of food and shortening the food supply chain between a farmer and consumer. South Africa is producing roughly 5 000 new agricultural graduates on an annual basis and about 29% are specialising in agricultural business, processing and logistics. The changing food market is creating opportunities for youth to become agripreneurs and drive localisation of food processing, packaging and distribution to homes.

Though Covid-19 has changed the food market and created new opportunities, the youth will not be able to capitalise unless affordable capital and technology is made available for them. This calls for Development Finance Institutions (DFIs) and government to create financing solutions that take into account the ground realities of youth.

Access to capital

There are more than 12 support measures announced by government, Development Finance Institutions and the private sector in the past two months, including: Resilience Facility by the Department of Small Business; Smallholder Farmer Relief by the Department of Agriculture, Land Reform and Rural Development; Solidarity Fund by the Presidency; Business Funding Solution by the National Empowerment Fund; South African Future Trust, and others.

The majority of these funding measures are supporting existing businesses, with limited to zero focus on new innovative business ventures.

Moreover, the announced support measures have stringent eligibility criteria, including a high minimum revenue threshold for each firm, proof of positive income for at least the past 12 months prior to the national lockdown, and evidence the business was in good financial state prior to the Covid-19 outbreak.

Effectively, most of the financial solutions created are perpetuating inequality in the country and reinforcing entry-barriers for new businesses in the formal economy, and worryingly, the government is leading the pack.

The changing consumer behavior influenced by social distancing practices suggest that there will be a new economic equilibrium post the lockdown and these will stimulate new businesses and innovations. The ability of the economy to recover from the Covid-19 crisis will largely depend how the policy and business environment safeguard the existing businesses and simultaneously accommodate and support new businesses ventures.

This will be possible if financial and support measures that have been created recognise new players in the economy. It is becoming evident that post Covid-19, many business that ascribed to traditional ways of business operation will likely not survive the new normality of social distancing and technologically inclined customers.

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