IMF Executive Board Concludes 2007 Article IV Consultation with South Africa

Public Information Notice (PIN) No. 07/94
August 6, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with South Africa is also available.

On July 25, 2007 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1


Real GDP grew by 5 percent in 2006 and continued to grow vigorously in early 2007. Growth was driven by strong domestic demand, with private consumption and investment spending supported by continuing robust consumer and business sentiment and low interest rates until late 2006. Household consumption was also boosted by growing disposable income and wealth effects from rising asset prices. Real GDP grew by 4.7 percent in the first quarter of 2007, indicating that conditions for business remained favorable.

The strong pace of economic activity led to higher employment. Total employment grew by 4.1 percent in the year to September 2006. However, the unemployment rate declined only moderately to 25.5 percent, as labor force participation rose.

Inflation pressures have intensified recently. After a prolonged period of remaining within the 3-6 percent target band, twelve-month CPIX inflation2 came at 6.3 percent in April 2007, reflecting both rising food and fuel prices and demand pressures. Inflation expectations for the year ahead, as reflected in inflation-indexed bond prices, point to a reading above 6 percent, broadly in line with the South African Reserve Bank's (SARB) updated outlook. In response to the deteriorating inflation outlook, the SARB raised its policy interest rate from 9 to 9½ percent in June.

Credit to the private sector has remained buoyant despite recent interest rate hikes, expanding by 25.1 percent in the year ending in April 2007. Household debt rose markedly (to 76 percent of disposable income by the first quarter of 2007, from 69.4 percent a year earlier). Pushed in part by rising interest rates, household debt service has risen to about 9½ percent of disposable income, but remains below historic highs.

The SARB has maintained a flexible exchange rate system, while continuing to build up international reserves. The SARB has a publicly-announced policy of intervening in the foreign exchange market only to bolster its reserve position. Consistent with this policy, gross reserves have continued to grow, and by May 2007 reached US$27.9 billion, equivalent to over 200 percent of short term external debt. After depreciating markedly in mid-2006, the rand has fluctuated without a clear trend.

The current account deficit expanded to 6½ percent of GDP in 2006 and 7 percent in the first quarter of 2007, largely driven by strong domestic demand. The widening of the current account reflected primarily faster volume growth in imports than exports. The deficit was more than covered by large portfolio inflows, mainly equity. External debt nevertheless rose marginally to 22.4 percent of GDP by end-2006.

The fiscal balance of the national government turned into a surplus of 0.6 percent of GDP in FY2006/07, bringing government debt down to about 31 percent of GDP. The surplus, the first in several decades, reflected a large increase in tax revenue, owing to strong economic activity and continued enforcement efforts.

Asset prices continued to rise rapidly in 2006 and early 2007. Strong commodity prices, favorable growth prospects, and positive assessments by rating agencies drove the Johannesburg Stock Exchange (JSE) all-share index up by 38 percent in 2006 and a further 15 percent through May 2007. Residential property prices continued their steady rise, growing by 15½ percent in the year ending in May 2007.

Executive Board Assessment

Directors noted that South Africa has started to reap the benefits of sustained sound macroeconomic management and structural reforms, recently supported by favorable external conditions. The economy has experienced vigorous growth and rising employment accompanied by rapid credit expansion, booming asset prices, strengthening public finances, and rising international reserves. At the same time, however, the external current account deficit has widened markedly, and inflation pressures have recently intensified. Directors also noted that South Africa continues to face high unemployment and poverty, and welcomed the government's efforts to tackle these problems while pursuing policies aimed at maintaining macroeconomic stability.

Directors considered that the economic outlook for South Africa remains broadly positive. Going forward, a range of indicators point to continuing robust growth. Inflation is expected to remain above the upper edge of the target band in the near term, however, and continuing strength of domestic demand would keep the current account deficit at relatively high levels.

Directors saw the main risks to the outlook coming from the global environment and the strong pace of domestic demand. On the external front, the economy could be adversely affected by weaker appetite for emerging market assets, a global slowdown, or a sharp deterioration in the terms of trade. Directors noted that the widening current account deficit and high reliance on portfolio inflows have raised vulnerability to external shocks. However, they believed that the country's strong fundamentals should limit the adverse impact of these shocks on the economy. On the domestic front, Directors considered that a continuation of rapid growth in domestic demand, in combination with capacity constraints, could lead to further widening of the current account deficit and intensifying price pressures.

Directors welcomed the additional monetary policy tightening in June, noting that risks to the inflation outlook remained on the upside. They considered that interest rates may need to be raised further, to anchor inflation expectations well within the target inflation band. Directors supported the authorities' commitment to the flexible exchange rate regime, as this is an integral part of the inflation targeting framework and provides a cushion against external shocks, thus helping to promote external stability. They noted that there was little conclusive evidence of any significant exchange rate misalignment. Directors encouraged the authorities to continue to relax exchange controls gradually, in order to allow for better allocation of resources and ultimately reduce exchange rate volatility through a deepening of the market.

Directors commended the authorities for their continuing sound fiscal policies. They noted that the budget balance has turned into a surplus for the first time in several decades and public debt has been declining steadily. Moreover, expenditures are appropriately focused on upgrading infrastructure and relieving pressing social needs. Directors welcomed the authorities' intention to maintain a broadly neutral fiscal stance in the current fiscal year, and most Directors considered that keeping such a stance until the external current account deficit starts declining may be warranted.

Directors noted the strength and resilience of the financial system, and encouraged the authorities to continue enhancing regulation and oversight, especially in the context of the current buoyant credit environment and the recent increase in household indebtedness. They commended the authorities' efforts to improve access to basic financial services, especially outside of urban areas. Directors also welcomed the authorities' interest in an update of the Financial Sector Assessment Program for South Africa in 2008.

Directors supported the government's goals of raising growth and reducing unemployment under the Accelerated and Shared Growth Initiative for South Africa. Potential growth seems to have increased in recent years, and could increase even further with the envisaged strong capital accumulation and productivity-enhancing structural reforms. In that regard, Directors considered that efforts to boost growth and employment could be complemented by further initiatives to improve the functioning of labor markets and liberalize the trade regime, and cautioned against the possible distortions that might arise from industrial policy interventions.

South Africa: Selected Economic Indicators, 2003-07
(Annual percent change, unless otherwise indicated)


2003 2004 2005 2006 2007

Real GDP

3.1 4.8 5.1 5.0 4.8

CPI (metropolitan areas, annual average)

5.8 1.4 3.4 4.7 6.3

CPIX 1, 2

4.0 4.3 4.0 5.0 6.1

Broad money 2

12.9 13.1 20.5 22.5 22.3

Unemployment rate (percent)

28.0 26.2 26.7 25.5 24.2

National government budget balance (percent of GDP) 3

-2.0 -1.7 -0.6 0.4 0.7

National government debt (percent of GDP) 3

35.4 35.1 33.9 31.4 28.3

External current account balance (percent of GDP)

-1.1 -3.2 -4.0 -6.5 -6.5

External debt (percent of GDP)

22.9 20.1 19.1 22.4 21.7

Gross reserves (SARB, in months of next year's total imports)

1.6 2.6 2.9 3.3 3.5

International liquidity position of SARB (billions of U.S. dollars) 2

4.8 11.4 17.2 23.0 26.0

U.S. dollar exchange rate (rand per U.S. dollar) 2

6.64 5.63 6.33 6.97 ...

Sources: South African Reserve Bank; IMF, International Financial Statistics; and staff estimates and projections.
1 The CPIX is equal to the CPI excluding interest payments on mortgage loans.
2 End of period.
3 Calendar year.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

2 The CPIX—the measure targeted by the SARB—excludes interest payments on mortgage loans.


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