## cr17189

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### Outlook and Key Macroeconomic Projections
- Growth projected to pick up to 1.0 percent in 2017 and 1.2 percent in 2018, largely owing to a recovery in agricultural and mining output in 2017 and a gradual improvement in consumption and investment thereafter.
- Projected output growth of 1 percent in 2017 is insufficient to keep pace with the increase in population; real GDP per capita growth projected at -0.6 percent in 2017 and -0.5 percent in 2018.
- Current account deficit projected to decline to 3 percent of GDP in 2017 and to widen to just below 4 percent of GDP in the medium term.
- Consumer price inflation recently returned below 6 percent and is projected to remain marginally below the upper threshold of the 3-6 percent target band for the remainder of 2017 and in 2018.
- With government debt projected to reach 56 percent of GDP in 2020, scope for macroeconomic stimulus is limited.

### Vulnerabilities, Risks, and Feedback Loops
- South Africa’s vulnerabilities have become more pronounced and are set to increase further unless economic growth revives.
- Key domestic risks:
  - Perceptions of weakening governance and uncertainties regarding future economic policies have adversely affected consumer and investor confidence.
  - Low growth has increased government debt and left the public sector balance sheet exposed to sizable contingent liabilities from state-owned enterprises (SOEs).
  - Protracted domestic policy uncertainty, renewed spending pressures (e.g., demands for free university tuition, a new costly public wage settlement in 2018), or deterioration in banks’ balance sheets from protracted low growth.
- Key external risks:
  - Possible decline in commodity prices; faster-than-expected rise in global interest rates; retreat from cross-border integration.
  - Vulnerability to tightening global financial conditions and a faster-than-expected normalization of U.S. interest rates.
- Macro-financial feedback estimates (staff):
  - Following a one percentage point decline in GDP growth, the NPL ratio would increase by 0.5 percentage point.
  - That NPL increase would dampen credit growth by 2 percentage points.
- DSA stress results:
  - Under a standard combination of macro-fiscal shocks, gross financing needs and the debt level could rise to slightly above 15 percent of GDP and 67 percent of GDP, respectively.
  - A customized persistently low growth scenario (growth permanently 1 percentage point lower on average during 2018–2022 plus a 300 basis points interest rate shock) would result in the debt-to-GDP ratio reaching 71 percent of GDP in 2022.
  - A contingent liability shock calling SOE loan guarantees and Road Accident Fund contingent liabilities could push debt above the 70 percent of GDP high-risk threshold by 2022.

### Fiscal Policy Stance, Risks, and Public Debt Dynamics
- Headline fiscal deficit reduced to 3.9 percent of GDP in FY2016/17 from 4.5 percent the previous fiscal year; the budget for FY2017/18 envisages a further moderate tightening.
- Directors encouraged prudent fiscal policy aimed at maintaining debt sustainability while prioritizing pro-growth and pro-poor spending.
- Staff assessment and projections:
  - Under staff’s more conservative nominal GDP assumptions, the debt ratio would increase during the budget projection period, reaching 56 percent in 2019/20.
  - Cumulative measures proposed for 2017/18–2019/20 amount to 1.9 percent of GDP, evenly split between expenditures and revenues.
  - Contingent liabilities estimated at 18 percent of GDP at end-March 2017; SOE loan related guarantees account for 56 percent of total contingent liabilities (10 percent of GDP).
- Fiscal policy recommendations:
  - Strengthen budget execution and implement revenue and fiscal reform measures to ensure government debt stabilizes significantly below 60 percent of GDP.
  - Prioritize measures that support economic growth and job creation, and reduce inequality.
  - Revenue-side options: consider Davis Tax Committee proposals, moderate increases in the standard VAT rate (with social grants to compensate the poor), higher taxation of property, measures to reduce base erosion and profit shifting.
  - Expenditure-side options: lower transfers to public enterprises (supported by SOE reforms), lower increases in public sector wages while protecting well-targeted social programs and productive investment.
  - Strengthen spending efficiency through penalties for failures to adhere to procurement guidelines and reduce irregular expenditures.

### State-Owned Enterprise (SOE) Reforms and Fiscal Risks
- Rationale: SOEs materially affect public finances, borrowing costs, economic growth, and job creation through costs of key inputs (power, telecommunications, transportation).
- Staff recommendations:
  - Comprehensive stocktaking and review of SOEs and subsidiaries to assess commercial viability and public policy relevance.
  - Stricter vetting for establishing new SOEs and subsidiaries; include SOE costs for public service delivery in the government budget.
  - Stricter enforcement, with sanctions, for breaches of the Public Financial Management Act.
- Authorities’ actions:
  - Committed to improving operating efficiency, governance, and financial performance of SOEs; November 2016 cabinet adopted a new governance framework for SOEs with guidelines on remuneration, board appointments, and public–private collaboration on infrastructure; implementation expected during the fiscal year.
- Contingent liabilities and recapitalization:
  - Recapitalizations of SOEs might be needed to address cumulated losses, which averaged 0.4 percent of GDP in the last eight fiscal years.
  - SOEs have received 1.2 percent of GDP annually, on average, in the last eight budget years (direct transfers, subsidies, recapitalizations).

### Monetary Policy and Financial Sector Policy
- Monetary policy stance:
  - SARB tightened the repo rate by 75 bps in early-2016 to 7.0 percent and has kept it at that level since then; rates can remain on hold given inflation expectations.
  - Keeping the repo rate unchanged at current levels is appropriate given inflation is projected marginally below the upper threshold of the 3–6 percent band for the remainder of 2017 and in 2018, and inflation expectations are anchored at about 6 percent.
  - Further tightening warranted if inflation expectations rise due to larger-than-expected second-round effects, unexpected fiscal loosening, or rapid exchange rate depreciation.
  - Seize opportunities to increase international reserves to the recommended range (e.g., large FDI inflow transactions), consistent with meeting the inflation objective.
- Prudential and resolution reforms:
  - Progress on implementing 2014 IMF FSAP recommendations, modernizing macro-prudential framework and introducing “Twin Peaks” and resolution regimes.
  - Financial Sector Regulation bill to execute Twin Peaks likely to be approved and implemented in 2017; Designated Institutions Resolution bill expected late 2017.
  - National Treasury and SARB published for comment a policy document on an explicit, privately-funded deposit insurance scheme.
  - SARB working toward countercyclical capital buffers, sectoral capital requirements, dynamic provisioning, leverage and liquidity ratios.
- Financial sector soundness and vulnerabilities:
  - Tier 1 capital ratio at 14.6 percent in April 2017.
  - NPL ratio declined to 2.4 percent in April 2017 from 3.1 percent in 2015 and 2.9 percent in 2016.
  - Return on assets 1.7 percent and return on equity 22 percent.
  - Customer deposits accounted for 49 percent of total non-interbank loans in April 2017.
  - Limited progress on collective investment schemes reform, fair competition promotion, financial inclusion, and consumer protection.
- Financial inclusion:
  - Only 9 percent of SMEs have credit facilities with banks; only 4 percent of the poorest 40 percent of households have borrowed from a bank in the past year.
  - Authorities granted three provisional banking licenses in 2016 (Post Bank, Discovery Bank, and TYME).
  - Policy options to expand inclusion: community-based credit unions, FinTech, microcredit insurance, financial literacy, expand eligible collateral, improve credit registries, reduce entry hurdles to payment systems.

### External Sector Assessment and Reserves
- External position in 2016 assessed as moderately weaker than implied by fundamentals and desirable policy settings.
- Key external indicators:
  - Gross external debt rose to 48.5 percent of GDP at end-2016.
  - Gross external financing needs projected at above 17 percent of GDP in 2017 (another table: gross external financing needs stood at 18 percent of GDP in 2016).
  - Gross international reserves as of end-2016 covered 104 percent of short-term debt (residual maturity) and were at 77 percent of the IMF’s Assessing Reserve Adequacy metric (84 percent after considering capital flow management measures), below the recommended range of 100 to 150 percent.
  - Net international investment position marginally positive at 3½ percent of GDP (end-2016).
- Current account:
  - CA deficit narrowed to 3.3 percent of GDP in 2016 and projected to decline to 3 percent of GDP in 2017; staff assesses the cyclically adjusted CA to be ½–2½ percentage points of GDP weaker than implied by fundamentals and desirable policy settings.
- REER assessment:
  - Staff assesses REER overvaluation of 0–10 percent for 2016, broadly consistent with the CA gap.
- Policy recommendation:
  - Speed up external adjustment, improve competitiveness, increase employment and savings; accelerate labor and product market reforms to attract durable foreign inflows such as FDI; seize large FDI inflow transactions to build up reserves.

### Structural Reform Priorities and Labor Market Policies
- Accelerate reforms in product, service, and labor markets to spur growth and job creation, especially for young people.
- Focus on sectors providing crucial inputs for firms: power generation, telecommunications, transportation, and financial services for SMEs.
- Labor market recommendations:
  - Improve educational attainment and skills; make wage determination more responsive to firm-specific circumstances, including productivity.
  - Wage determination should reflect firm-specific circumstances; monitor the national minimum wage’s employment effects and stand ready to introduce complementary measures.
  - Promote initiatives to improve labor relations, including implementation of a code of good practice in collective bargaining.
- Product and service market priorities:
  - Reduce barriers to entry and conflicting regulations; swiftly allocate broadband spectrum; allow private sector producers to compete with the state-owned utility on an equal footing in power generation; reduce port tariffs; facilitate private competition with large SOEs; support proactive Competition Commission inquiries.
- Education:
  - South Africa’s education outcomes lag peers despite higher spending; policy prescriptions include strengthening teacher training and accountability, improving equity and efficiency in resource allocation, and closer coordination between tertiary institutions and employers for internships and school-to-work transitions.

### National Minimum Wage (NMW) — Annex X
- Agreement reached February 2017 to establish a national minimum wage.
- NMW specifics:
  - NMW: R20 per hour (equivalent to $1.35 at market exchange rate at end-2016 or $3.44 at 2016 purchasing power parity).
  - Expected monthly translation: R3,500 per month given 175 hours per month.
  - Envisaged effective date: May 2018.
  - Transitional lower minima for two sectors upon introduction: Farm workers R18 (90 percent of NMW); Domestic workers R15 (75 percent of NMW). Transitional exemption expected to last for two years.
- Distributional and compliance findings:
  - Overall share of employed workers currently earning less than the proposed NMW: 47.3 percent.
  - Sector shares below R3,500: Agriculture 84.5 percent; Private Households 90.7 percent; Wholesale and Retail Trade 48.2 percent; Construction 54.6 percent; Manufacturing 39.7 percent.
  - Informal workers share of total employees: 16.7 percent in 2016Q4.
  - Estimated rate of compliance with minimum wages in formal sector: 55 percent, with an average shortfall of 36 percent of the applicable minimum wage.
- Policy guidance:
  - Closely monitor employment performance after NMW introduction, especially in most affected sectors.
  - Consider rules-based exemptions beyond agriculture and domestic workers (e.g., for newly-hired youth) and readiness to introduce complementary measures for SMEs or youth if adverse employment effects materialize.

### Key Indicators (selected exact values from staff tables)
- Nominal GDP (2016, billions of US dollars): 295
- GDP per capita (2016, in US dollars): 5272
- Population total (2016, million): 55.9
- Unemployment rate (percent of labor force, annual average): 24.7 (2013), 25.1 (2014), 25.4 (2015), 26.7 (2016), 27.4 (2017 Est.), 28.0 (2018 Proj.)
- Real GDP growth (annual percent): 2.5 (2013), 1.7 (2014), 1.3 (2015), 0.3 (2016), 1.0 (2017 Est.), 1.2 (2018 Proj.)
- Real GDP per capita (annual percent): 0.9 (2013), 0.1 (2014), -0.3 (2015), -1.3 (2016), -0.6 (2017 Est.), -0.5 (2018 Proj.)
- CPI (annual average): 5.8 (2013), 6.1 (2014), 4.6 (2015), 6.3 (2016), 5.7 (2017 Est.), 5.6 (2018 Proj.)
- Repo rate (percent, end-period): 5.0 (2013), 5.8 (2014), 6.3 (2015), 7.0 (2016), 7.0 (2017 average Jan–May)
- Gross government debt (central government, percent of GDP): 44.1 (2013), 47.0 (2014), 49.3 (2015), 51.7 (2016), 52.6 (2017 Est.), 54.7 (2018 Proj.)
- Current account balance (percent of GDP): -5.9 (2013), -5.3 (2014), -4.4 (2015), -3.3 (2016), -3.0 (2017 Est.), -3.4 (2018 Proj.)
- Gross reserves (billions of U.S. dollars): 49.6 (2013), 49.1 (2014), 45.8 (2015), 47.4 (2016), 47.4 (2017 Est.), 47.4 (2018 Proj.)
- Total external debt (percent of GDP): 37.2 (2013), 41.3 (2014), 39.1 (2015), 48.5 (2016), 45.2 (2017 Est.), 46.2 (2018 Proj.)
- Headcount ratio at $1.90 a day (2011 PPP) (percent of population): 16.6
- Undernourishment (2015): 5.0
- Highest 10 percent income share: 51.3
- Lowest 20 percent income share: 2.5
- Gini coefficient (2010): 63.4
- Life expectancy at birth (years), 2016: 62
- Urban population (percent of total), 2014: 64

### Executive Board Assessment and Policy Recommendations (selected)
- Scope for monetary or fiscal stimulus is limited; keeping policy rates on hold is appropriate given inflation projections.
- Prudent fiscal policy is needed to maintain debt sustainability while prioritizing growth- and poverty-reducing spending.
- Monitor and manage fiscal risks from government guarantees; reform SOEs.
- Accelerate product, service, and labor market reforms to spur growth and job creation.
- Wage determination should reflect firm-specific circumstances; monitor the national minimum wage’s employment effects and be ready to introduce complementary measures.
- Bring financial sector reforms to fruition, enhance resolution framework, and promote greater banking competition.
- Encourage greater durable foreign investment and increased international reserves.

*International Monetary Fund — SOUTH AFRICA: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17189).*

### 1.2 percent in 2018, still insufficient to keep pace with the rising population. The current account

### SOUTH AFRICA — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION

### Outlook and Key Macroeconomic Projections
- Growth is projected to pick up to 1.0 percent in 2017 and 1.2 percent in 2018, largely owing to a recovery in agricultural and mining output in 2017 and a gradual improvement in consumption and investment thereafter.
- Projected output growth of 1 percent in 2017 is insufficient to keep pace with the increase in population; real GDP per capita growth is projected at -0.6 percent in 2017 and -0.5 percent in 2018.
- Current account deficit is projected to decline to 3 percent of GDP in 2017 and to widen to just below 4 percent of GDP in the medium term.
- Consumer price inflation recently returned below 6 percent and is projected to remain marginally below the upper threshold of the 3-6 percent target band for the remainder of 2017 and in 2018.
- With government debt projected to reach 56 percent of GDP in 2020, scope for macroeconomic stimulus is limited.

### Vulnerabilities and Risks
- South Africa’s vulnerabilities have become more pronounced and are set to increase further unless economic growth revives.
- Low growth has increased government debt and left the public sector balance sheet exposed to sizable contingent liabilities from state-owned enterprises (SOEs).
- Perceptions of weakening governance and uncertainties regarding future economic policies have adversely affected consumer and investor confidence.
- External sector risks: large gross external financing needs, financed mainly by portfolio flows, exposing South Africa to significant financing risks.
- Exchange rate vulnerabilities are attenuated by a freely floating exchange rate, corporate resilience to sizable exchange rate depreciation in recent years, and a high share of domestic-currency-denominated government debt.
- Shocks could be amplified by linkages among the real, financial, and fiscal sectors, especially if local currency sovereign credit ratings are downgraded to below investment grade.
- External risks include a possible decline in commodity prices, faster-than-expected rise in global interest rates, or a retreat from cross-border integration.

### Fiscal and Monetary Policy Stance
- Monetary policy: South African Reserve Bank tightened the repo rate by 75 bps in early-2016 to 7.0 percent and has kept it at that level since then; rates can remain on hold given inflation expectations.
- Fiscal policy: Headline fiscal deficit reduced to 3.9 percent of GDP in FY2016/17 from 4.5 percent the previous fiscal year; the budget for FY2017/18 envisages a further moderate tightening.
- Directors encouraged prudent fiscal policy aimed at maintaining debt sustainability while prioritizing pro-growth and pro-poor spending.
- Directors urged strengthening budget execution and implementing revenue and fiscal reform measures to ensure government debt stabilizes significantly below 60 percent of GDP.
- Emphasis on monitoring and managing fiscal risks from explicit or implicit government guarantees, and on reform of state-owned enterprises.

### Structural Reform Priorities
- Accelerate reforms in product, service, and labor markets to spur growth and job creation, especially for young people.
- Focus reforms on sectors providing crucial inputs for firms: power generation, telecommunications, transportation, and financial services for SMEs.
- Labor market: improve educational attainment and skills; make wage determination more responsive to firm-specific circumstances, including productivity.
- National minimum wage (expected in mid-2018) has potential to help millions; its impact on employment should be carefully monitored and complementary measures for young workers and SMEs should be ready.
- Promote initiatives to improve labor relations, including implementation of a code of good practice in collective bargaining.
- Strengthen governance and fight corruption.
- Financial sector: complete ongoing reforms to prudential regulation and the resolution framework; increase competition in banking; robustly implement the Financial Intelligence Center Amendment Act.
- Greater access to finance with proper supervision would help reduce inequality; greater attraction of durable foreign investment and increasing international reserves would enhance resilience.

### Executive Board Assessment and Recommendations
- Scope for monetary or fiscal stimulus is limited; keeping policy rates on hold is appropriate given inflation projections.
- Prudent fiscal policy is needed to maintain debt sustainability while prioritizing growth- and poverty-reducing spending.
- Monitor and manage fiscal risks from government guarantees; reform SOEs.
- Accelerate product, service, and labor market reforms to spur growth and job creation.
- Wage determination should reflect firm-specific circumstances; monitor the national minimum wage’s employment effects and stand ready to introduce complementary measures.
- Bring financial sector reforms to fruition, enhance resolution framework, and promote greater banking competition.
- Encourage greater durable foreign investment and increased international reserves.

### Key Indicators (selected exact values from staff tables)
- Nominal GDP (2016, billions of US dollars): 295
- GDP per capita (2016, in US dollars): 5272
- Population total (2016, million): 55.9
- Unemployment rate (percent of labor force, annual average): 24.7 (2013), 25.1 (2014), 25.4 (2015), 26.7 (2016), 27.4 (2017 Est.), 28.0 (2018 Proj.)
- Real GDP growth (annual percent): 2.5 (2013), 1.7 (2014), 1.3 (2015), 0.3 (2016), 1.0 (2017 Est.), 1.2 (2018 Proj.)
- Real GDP per capita (annual percent): 0.9 (2013), 0.1 (2014), -0.3 (2015), -1.3 (2016), -0.6 (2017 Est.), -0.5 (2018 Proj.)
- CPI (annual average): 5.8 (2013), 6.1 (2014), 4.6 (2015), 6.3 (2016), 5.7 (2017 Est.), 5.6 (2018 Proj.)
- Repo rate (percent, end-period): 5.0 (2013), 5.8 (2014), 6.3 (2015), 7.0 (2016), 7.0 (2017 average Jan–May)
- Gross government debt (central government): 44.1 (2013), 47.0 (2014), 49.3 (2015), 51.7 (2016), 52.6 (2017 Est.), 54.7 (2018 Proj.)
- Current account balance (percent of GDP): -5.9 (2013), -5.3 (2014), -4.4 (2015), -3.3 (2016), -3.0 (2017 Est.), -3.4 (2018 Proj.)
- Gross reserves (billions of U.S. dollars): 49.6 (2013), 49.1 (2014), 45.8 (2015), 47.4 (2016), 47.4 (2017 Est.), 47.4 (2018 Proj.)
- Total external debt (percent of GDP): 37.2 (2013), 41.3 (2014), 39.1 (2015), 48.5 (2016), 45.2 (2017 Est.), 46.2 (2018 Proj.)
- Headcount ratio at $1.90 a day (2011 PPP) (percent of population): 16.6
- Undernourishment (2015): 5.0
- Highest 10 percent income share: 51.3
- Lowest 20 percent income share: 2.5
- Gini coefficient (2010): 63.4
- Life expectancy at birth (years), 2016: 62
- Urban population (percent of total), 2014: 64

*Source: IMF staff report — SOUTH AFRICA: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (June 9, 2017).*

### 3. The electoral calendar has

### 3. The electoral calendar has

### Political uncertainty and perceived policy shifts
- Public discourse ahead of the 2019 presidential elections increasingly focuses on “radical economic transformation,” including more rapid transfer of economic resources to the black majority and other disadvantaged groups.
- A government reshuffle in late March 2017 led the rand to depreciate by 8 percent within a few days, although the currency has largely recovered since then.
- Increased competition among candidates for election in December to the presidency of the African National Congress—the party with an absolute parliamentary majority since 1994—may heighten uncertainty for the remainder of the year.
- Low investment and consumer confidence have been associated with rising uncertainty regarding the direction of policies and perceptions of weakening governance (including control of corruption), illustrated by a gradual worsening of the Doing Business index and the Control of Corruption index assembled by the World Bank.

### Economic performance and growth
- Real GDP growth weakened to 0.3 percent in 2016 from 1.3 percent in 2015.
- Domestic demand stalled: private investment declined and private consumption was constrained by tighter credit conditions and higher unemployment.
- Net exports contributed positively to growth as the decline in imports more than offset weakening export demand.
- Supply-side: declines in agricultural and mining production (owing to drought conditions and low commodity prices) and weak growth in financial services and other business-cycle sensitive sectors.
- Employment growth fell to 0.3 percent in 2016 from 3.9 percent in 2015; employment shrank in agriculture, mining, and manufacturing, and hiring slowed in construction, financial, real estate, business services, and general government.

### Inflation and monetary policy
- Headline inflation (y-o-y) fell to 5.3 percent in April 2017—the first observation within the 3–6 percent target range in about three quarters.
- Above-target inflation in 2016 and early 2017 stemmed primarily from the drought, a slight rebound in oil prices, increases in fuel excises, and the lagged impact of nominal depreciation of the effective exchange rate (by 16 percent during calendar year 2015).
- To reduce the likelihood of second-round effects, the South African Reserve Bank (SARB) tightened the repo rate in stages by 75 bps in early 2016 and has kept it at that level since then.
- Core inflation remained comfortably below 6 percent throughout 2016 and into 2017.
- The recent drop in inflation was largely due to improved rainfall.

### Fiscal stance and public finances
- The fiscal policy stance was moderately tightened in FY2016/17.
- The headline deficit was reduced to 3.9 percent of GDP from 4.5 percent the previous fiscal year.
- Expenditures declined as a share of GDP (and remained broadly stable excluding a one-off recapitalization of Eskom that took place during the previous fiscal year).
- Gross tax revenues as a share of GDP remained stable in FY2016/17 for the first time since FY2012/13, despite tax measures, as both economic growth and revenue buoyancy fell short of expectations.
- Tax measures in the 2016/17 budget amounted to 0.4 percentage point of GDP.

### External sector and financing
- The current account deficit narrowed to 3.3 percent of GDP in 2016, financed by portfolio flows.
- The trade balance turned to a surplus in 2016; terms of trade improved modestly.
- Net direct investment outflows fell to 0.4 percent of GDP in 2016 from net outflows of 1.3 percent of GDP the previous year.
- The 2016 external position is assessed as moderately weaker than implied by fundamentals and medium-term desirable policy settings.
- In 2016, South Africa’s imports and exports of goods and services were each equivalent to about 30 percent of GDP (11 and 9 percentage points of GDP higher than in 1994, respectively).
- Sub-Saharan Africa accounted for 28 percent of total goods exports in 2016.
- Gross external debt was equivalent to 48½ percent of GDP at end-2016.
- Gross external financing needs were projected at above 17 percent of GDP in 2017.
- Gross external liabilities were large at 128 percent of GDP at end-2016; the net international investment position was marginally positive at 3½ percent of GDP.
- Gross international reserves as of end-2016 covered 104 percent of short-term debt (residual maturity) and were at 77 percent of the IMF’s Assessing Reserve Adequacy metric (84 percent after considering capital flow management measures), below the recommended range of 100 to 150 percent.

### Financial sector conditions and inclusion
- Financial conditions remain tight; an index summarizing banking sector and capital markets conditions is somewhat above its 10-year average.
- Credit growth moderated, especially for households; large corporations have adequate liquidity while SMEs face greater financing challenges.
- Sovereign ratings weakened, with most recent downgrades occurring in April 2017 after the government reshuffle in late March.
- Foreign currency debt is below investment grade for two rating agencies; local currency debt is below investment grade for one agency and has been excluded from the JPMorgan GBI-EM GD IG index.
- An additional downgrade of LC debt to below investment grade would lead to exclusion from further indices, forcing divestment by several institutional investors and adversely affecting external funding and capital flows.
- Non-financial corporates are more profitable and less indebted, on average, than in other emerging markets; NFC debt increased during the past decade but does not stand out relative to other emerging markets.
- Banking sector: Tier 1 capital ratio at 14.6 percent in April 2017; NPL ratio declined to 2.4 percent in April 2017 from 3.1 percent in 2015 and 2.9 percent in 2016.
- Return on assets was 1.7 percent and return on equity was 22 percent (one of the highest since the global financial crisis).
- Customer deposits accounted for 49 percent of total non-interbank loans in April 2017.
- Financial inclusion concerns: only 9 percent of SMEs have credit facilities with banks and only 4 percent of the poorest 40 percent of households have borrowed from a bank in the past year.

### Outlook and projections
- Growth is projected to rise to 1.0 percent in 2017 with better rainfall, an increase in mining output prompted by a moderate rebound in commodity prices, and prospects for a continued low number of days lost to strikes.
- Private consumption growth is projected to be broadly unchanged at about 1 percent.
- Private investment is expected to decline but at a slower pace than in 2016.
- Net exports are expected to remain supportive of growth.
- Economic growth is projected to recover gradually in subsequent years to 2.2 percent, slightly above population growth.
- Headline inflation (y-o-y) is projected marginally below 6 percent for the remainder of 2017 and in 2018; inflation expectations are well anchored at about 6 percent for the next two years.
- The current account deficit is projected to decline to 3 percent of GDP in 2017 and to return to just below 4 percent of GDP over the medium term.
- External debt is seen rising to almost 50 percent of GDP over the medium term.
- Government debt projected at 52.6 percent of GDP by the end of fiscal year 2017; public sector’s balance sheet exposed to contingent liabilities from SOEs equal to 10 percent of GDP.
- Gross international reserves adequacy and significant gross external financing needs expose South Africa to financing risks.

### Risks and vulnerabilities
- Risks are tilted to the downside given challenging external and domestic contexts.
- External risks:
  - Vulnerability to tightening global financial conditions and a faster-than-expected normalization of U.S. interest rates.
  - Risks from unstable wholesale funding from European banks and exposure to sub-Saharan African borrowers, especially if accompanied by further local currency sovereign downgrades.
  - A fall in prices of South Africa’s main commodity exports would reduce investment and worsen the current account.
  - Slowdown in partner growth (e.g., China, destination for about 10 percent of South Africa’s exports) or structurally weak growth in key advanced and emerging economies would transmit shocks via financial markets and trade.
- Domestic risks:
  - Protracted domestic policy uncertainty and continued deterioration in perceptions of governance quality.
  - Renewed spending pressures (e.g., demands for free university tuition, a new costly public wage settlement in 2018, or materialization of contingent liabilities from SOEs).
  - Reversal of the recent improvement in labor relations.
  - Deterioration in banks’ balance sheets stemming from protracted low growth.

*cr17189 - 3. The electoral calendar has*

### 18. Feedback loops between the real, financial, and fiscal sectors could amplify the impact

### 18. Feedback loops between the real, financial, and fiscal sectors could amplify the impact

### Feedback loops and macro-financial transmission
- Continued low growth with rising unemployment would worsen household and firm finances, increasing NPLs in banks’ loan portfolios and prompting portfolio rebalancing by foreign investors and domestic non-bank institutions, which would reduce liquidity and increase funding costs for banks.
- Under tightened funding and reduced liquidity, banks would likely curtail credit, further exacerbating the growth downturn.
- Staff estimates on macro-financial linkages:
  - Following a one percentage point decline in GDP growth, the NPL ratio would increase by 0.5 percentage point.
  - That NPL increase would dampen credit growth by 2 percentage points (Annex VI. Macro-financial Linkages in South Africa).
- Lower growth and weaker bank profitability would materially reduce tax revenues, requiring further fiscal adjustment to maintain debt sustainability and imparting an additional negative impulse to growth.

### Authorities’ views on risks and feedback loops
- Authorities broadly concurred with staff on the main factors shaping the outlook and external risks.
- Near-term growth supports cited by authorities: improvements in agricultural output and a pickup in mining production.
- Authorities expected a more gradual increase in domestic demand in the medium term, implying weaker import growth than staff forecast and a higher contribution of net exports to growth.
- External risks emphasized: higher global uncertainty, a possible decline in commodity prices (potentially related to a growth slowdown in China), and tightening of U.S. monetary policy.
- Domestic risks emphasized: policy continuity, resolution of mining sector issues, and that markets sometimes react excessively to near-term political developments rather than economic fundamentals.
- Authorities agreed prolonged low growth increases vulnerabilities but saw the risk of a sudden stop as relatively low and highlighted banking system resilience and the high domestic currency share in total liabilities.

### Fiscal policy: outlook, risks, and priorities
- 2017 budget objectives and staff assessment:
  - Authorities’ proposed deficit reduction path aims to stabilize gross government debt to GDP at 53 percent of GDP in 2018/19.
  - Under staff’s more conservative nominal GDP assumptions, the debt ratio would increase during the budget projection period, reaching 56 percent in 2019/20.
  - Cumulative measures proposed for 2017/18–2019/20 amount to 1.9 percent of GDP, evenly split between expenditures and revenues (with specific measures for 2018/19–2019/20 to be determined).
  - Staff view: the moderate degree of fiscal adjustment is broadly appropriate but fiscal space is limited.
- Fiscal risks and shock scenarios:
  - If growth is 1 percentage point lower than baseline on average during 2018–22, the debt ratio would reach a level 14 percentage points of GDP higher than in the baseline by the end of the projection period (Annex VII. Public Debt Sustainability Analysis).
  - Contingent liabilities were estimated at 18 percent of GDP at end-March 2017, more than half related to SOEs.
  - Recapitalizations of SOEs might be needed to address cumulated losses, which averaged 0.4 percent of GDP in the last eight fiscal years.
- Historical fiscal composition and trends:
  - Primary expenditures rose by 1.5 percentage points of GDP between 2012/13 and 2015/16, owing primarily to public enterprise-related transfers (0.8 percent of GDP, including a 0.6 percent of GDP equity injection for Eskom in 2015/2016) and increases in consolidated government employment (0.3 percent of GDP).
  - Transfers to public enterprises averaged 0.8 percent of GDP annually in the last 8 years.
- Fiscal policy priorities and recommended measures:
  - Prioritize measures that support economic growth and job creation, and reduce inequality.
  - Revenue-side options: consider Davis Tax Committee proposals, moderate increases in the standard VAT rate (with social grants to compensate the poor), higher taxation of property, and measures to reduce base erosion and profit shifting.
  - Expenditure-side options: lower transfers to public enterprises (supported by SOE reforms), lower increases in public sector wages while protecting well-targeted social programs and productive investment.
  - Within infrastructure, prioritize projects improving commuter access to work and locate subsidized housing near business developments creating jobs.
  - Strengthen spending efficiency through penalties for failures to adhere to procurement guidelines and reduce irregular expenditures.

### State-owned enterprise (SOE) reforms
- Rationale: SOEs materially affect public finances, borrowing costs, economic growth, and job creation through costs of key inputs (power, telecommunications, transportation).
- Potential reform directions:
  - Comprehensive stocktaking and review of SOEs and subsidiaries, assessing commercial viability and public policy relevance.
  - Stricter vetting for establishing new SOEs and subsidiaries.
  - Include SOE costs for public service delivery in the government budget.
  - Stricter enforcement, with sanctions, for breaches of the Public Financial Management Act (Annex VIII. SOE Reforms–International Experience).
- Authorities’ stance:
  - Committed to improving operating efficiency, governance, and financial performance of SOEs, and strengthening oversight for national public entities.
  - In November 2016 cabinet adopted a new governance framework for SOEs with guidelines on remuneration, board appointments, and public–private collaboration on infrastructure; implementation expected during the fiscal year.

### Monetary and financial sector policies
- Monetary policy stance and guidance:
  - Monetary policy can remain on hold unless inflation expectations rise or external financing becomes challenging.
  - Keeping the repo rate unchanged at current levels is appropriate given that inflation is projected marginally below the upper threshold of the 3–6 percent band for the remainder of 2017 and in 2018, and inflation expectations currently remain well anchored at about 6 percent.
  - Further tightening would be warranted if inflation expectations rise due to larger-than-expected second-round effects of fuel and food price inflation, unexpected fiscal loosening, or rapid exchange rate depreciation from increased political and policy uncertainty.
  - Seize opportunities to increase international reserves to the recommended range (e.g., large FDI inflow transactions), consistent with meeting the inflation objective.
- Prudential and resolution reforms:
  - Progress made on implementing 2014 IMF FSAP recommendations, particularly modernizing the macro-prudential framework and introducing “Twin Peaks” and resolution regimes.
  - Financial Sector Regulation bill to execute Twin Peaks likely to be approved and implemented in 2017; Designated Institutions Resolution bill expected to be submitted to parliament in late 2017.
  - National Treasury and SARB published for public comment a policy document on an explicit, privately-funded deposit insurance scheme.
  - SARB working toward an enhanced macro-prudential framework including countercyclical capital buffers, sectoral capital requirements, dynamic provisioning, leverage and liquidity ratios.
  - Tightening of credit standards since 2015 has helped correct past frothiness in household credit markets and contributed to reduced household indebtedness.
  - Limited progress noted on reform of collective investment schemes, promotion of fair competition and financial inclusion, and better consumer protection.
- Financial inclusion and consumer protection:
  - Access to financial services for low-income households and SMEs needs enhancement to foster growth and reduce inequality, while maintaining supervision to avoid financial stability risks.
  - Authorities’ recent actions: SARB granted three provisional banking licenses in 2016 (Post Bank, Discovery Bank, and TYME), and the market conduct authority under Twin Peaks is expected to increase transparency for consumer and SME financial products.
  - Internationally informed policy options to expand inclusion while controlling risks:
    - Encourage community-based credit unions, FinTech institutions, and microcredit insurance.
    - Promote financial literacy and protect low-income borrowers from predatory lending and abusive recovery.
    - Streamline disclosure standards for small-scale lending.
    - Expand eligible collateral and improve centralized credit registry systems.
    - Reduce hurdles for entrants, such as non-transparent rules for access to clearing and payment systems.
- Anti–money laundering and financial integrity:
  - Full and swift implementation of the Financial Intelligence Center Amendment (FICA) Act is needed to meet international standards against money laundering and terrorism financing.
  - The FICA Bill was signed in April 2017; next step is issuance and enactment of regulations for full implementation.
  - Failure to comprehensively implement could lead to a Financial Action Task Force statement on the risk of doing business with South Africa and increase international transaction costs.

### Authorities’ views on monetary and regulatory policy
- Authorities shared mission views on monetary policy and regulatory reforms.
- They considered the monetary tightening cycle may have ended, but noted rates could only be reduced if the inflation outlook improved durably.
- Implementing regulations for the FICA law are being prepared for full implementation by late 2017.

*International Monetary Fund. Chapter: 18. Feedback loops between the real, financial, and fiscal sectors could amplify the impact.*

### 33. On the banking system, the authorities highlighted its resilience and their plans to

### 33. On the banking system, the authorities highlighted its resilience and their plans to 

### Banking system: resilience and competition
- Capital adequacy ratios and profitability remain high across the banking system, with low NPLs and limited foreign currency exposure.
- Despite headwinds from low economic growth, banks are well positioned to cope with lower profits and higher impairment.
- The high degree of concentration provides stability but increases the tendency for “too-big-to-fail” situations and greater risk of contagion.
- Tradeoff management:
  - Effective prudential regulations and oversight by competition authorities are needed to manage concentration-related risks.
  - Authorities are analyzing possible ways of moving toward a tiered banking system allowing for mid-sized banks with proportionally less stringent regulatory requirements.
- Actions to improve competition and reduce costs:
  - Further analysis of the sources of high fees in the retail banking industry and action to reduce them would be beneficial.
  - Regulations have been issued to limit interest rates and fees on loans as well as the cost of credit life insurance for various credit facilities.
- Policy note: The expected provision of new banking licenses is a step toward greater competition; access to credit should be expanded with proper supervision to prevent an increase in financial stability risks.

### Financial inclusion, market conduct, and FinTech
- Authorities deem more needs to be done to improve financial inclusion, supported by strong market conduct and consumer protection regulation.
- Views:
  - Authorities agree greater financial inclusion could favorably impact economic growth and reduce inequality, but views differed on the extent of impact.
  - Authorities highlighted that increased access to credit had unintended consequences, including over-indebtedness.
- Preferred sustainable approach:
  - Encourage savings to support asset and wealth creation.
- Measures under exploration:
  - Improve availability of credit information.
  - Establish viable risk-sharing schemes.
  - Extend the asset classes that can practically be used as collateral.
  - Promote FinTech.
- Institutional and regulatory developments:
  - Subject to the passage of the Financial Sector Regulation Bill, the Financial Sector Conduct Authority and Ombud Council will be established in 2017 to ensure a fairer and more effective financial sector.
  - A FinTech regulatory framework (part of the Conduct of Financial Institutions Bill) could include a “regulatory sandbox” to encourage innovation within a controlled environment while managing any potential risks.

### Contingency planning and crisis management
- Existing frameworks used and to be enhanced:
  - The Financial Sector Contingency Forum (FSCF) recently conducted a simulation exercise to assess operational risk.
  - The SARB established a Financial Crisis Planning Working Group (FCPWG) in early-2017, including external stakeholders such as the National Treasury and the Financial Services Board, to enhance the crisis management framework and align it with the new regulatory framework.
- Planned legal reforms to buttress resilience:
  - Implementation of the Financial Sector Regulation Act beginning later this year, soon to be followed by a financial sector resolution bill, including a deposit insurance scheme.
  - Full and swift implementation of the FICA Act to align with international standards against money laundering, financing of terrorism, and other illegal financial transactions.

### Labor market and product/service market reforms (context relevant to financial sector)
- Labor market developments:
  - National minimum wage (NMW) agreement: R20 per hour (R18 for agriculture and R15 for domestic workers).
  - Draft Code of Good Practice for Collective Bargaining, Industrial Action, and Picketing emphasizes measures such as expectation of a secret ballot ahead of a strike and initiatives to reduce violence or intimidation.
  - If transferred into draft legislation and approved, implementation could begin as early as May 1, 2018.
  - The proposed NMW level is described as “on the high side in international comparisons” and seeks to ensure a reasonable living standard for millions near or below the poverty line.
  - To reduce risk of adverse employment effects, the initial NMW phase-in period should be closely monitored, with readiness to introduce complementary measures for vulnerable sectors (e.g., SMEs or youth).
- Product/service market priorities affecting competition and costs:
  - Reduce barriers to entry and conflicting regulations.
  - Swiftly allocate broadband spectrum through auctions or other transparent processes to promote competition.
  - Allow private sector producers to compete with the state-owned utility on an equal footing in power generation as demand grows.
  - Reduce port tariffs to levels more reflective of costs and international norms, especially where they place sectors at a disadvantage.
  - Facilitate private competition with large SOEs and support proactive Competition Commission inquiries to curtail anti-competitive behavior.

### Policy recommendations and priorities (selected)
- Reduce barriers to entry and conflicting regulations to foster competition in energy, transportation, and telecommunications.
- Further labor market reforms:
  - Ensure wage levels are determined by market conditions relevant to firm-specific circumstances (e.g., exempt SMEs from collective bargaining outcomes).
  - Introduce a single employment contract with gradual, continuous increases of rights and benefits accruing with tenure to ease youth entry into the labor market.
  - Consider subsidies for transportation to young unemployed taking up new jobs.
  - Consider greater use of profit-sharing and allocation of shares to workers to reduce inequality and improve labor relations.
- Reform public schools to improve educational outcomes through:
  - Enhancing opportunities for upgrading the skills of teachers and making them more accountable.
  - Improving equity and efficiency in resource allocation among school districts, especially rural vs. urban.
  - Enhancing cooperation between educational institutions and employers for internships and school-to-work transition.
- Strengthen governance and transparency in public enterprises, procurement, and quantify public service obligations to reassure investors and lower borrowing costs.
- Support the Competition Commission in proactive market inquiries and anti-cartel actions.

### Key statistics and thresholds cited
- NMW levels in the agreement: R20 per hour; R18 for agriculture; R15 for domestic workers.
- Possible NMW implementation start date: May 1, 2018.
- Fiscal target reference: ensure that government debt peaks significantly below 60 percent of GDP.
- Headline inflation projection: marginally below 6 percent in the remainder of 2017 and in 2018.
- Institutional timing: Financial Sector Conduct Authority and Ombud Council to be established in 2017 (subject to passage of bill).
- SARB initiative timing: Financial Crisis Planning Working Group established in early-2017.

### Staff appraisal: implications for financial-sector policy
- Structural reforms in product/service markets and labor markets are the primary avenue to stimulate growth and job creation given limited room for macroeconomic stimulus.
- Financial-sector reforms to modernize prudential regulation and enhance the resolution framework will further buttress resilience.
- Foster competition in the banking system to enhance financial inclusion, allowing SMEs and low-income households greater access to finance, thereby helping to reduce inequality.
- Attract more durable foreign investment and increase international reserves to enhance resilience; staff view the external position in 2016 as moderately weaker than implied by fundamentals and desirable policy settings.
- The SARB should seize opportunities to increase reserves to the desirable level, consistent with meeting the inflation objective.

*International Monetary Fund — cr17189*

### 50. It is proposed that South Africa remain on the standard 12-month Article IV cycle.

### cr17189 - 50. It is proposed that South Africa remain on the standard 12-month Article IV cycle.

### Overview
- It is proposed that South Africa remain on the standard 12-month Article IV cycle.

### Inequality
- South Africa remains one of the world’s most unequal societies as illustrated by high Gini Index values and high 90:10 ratios.
- Sources cited: Luxembourg Income Study and World Bank; data drawn from the most recent household survey available.

### Employment and Labor Market
- Job growth has been weak in all sectors.
- Until recent efforts to contain the wage bill, employment creation was more reliant on the public sector.
- Employment growth was almost nil in 2016.
- The proportion of working age population employed is one of the lowest among EMs, especially for youth.
- Youth unemployment rate and overall unemployment remain elevated.
- Total real earnings have outpaced productivity despite a recent slowdown (index, 2007=100; series shown through Q3-2016).
- Absorption Rate, 2016: South Africa is shown relative to peers for total absorption rate and youth absorption rate (percent).

### Growth Performance and Drivers (2016 and early 2017)
- Growth slowed further in 2016.
- Trading partner growth continued to slow in 2016.
- Agricultural and mining production declined owing to drought conditions and low commodity prices.
- Domestic demand ground to a halt due to slowing consumption and declining private investment, reflecting weak business confidence and record low consumer confidence.
- Forward looking indicators pointed to a modest recovery in 2017.
- Eskom installed capacity and workdays lost to strikes tracked from 2012–2016; labor relations remained stable and electricity capacity increased.
- Contributions to GDP growth by sector include: Finance, real estate and business services; Wholesale and retail trade; Mining and quarrying; Agriculture, forestry and fishing; and Other.

### Monetary Policy and Inflation
- Headline Inflation rose above the 6 percent top band in 2016 driven by higher food and fuel prices.
- Core inflation also increased but remained below 6 percent.
- Import prices continued their decline despite a temporary recovery.
- A growing output gap kept exchange rate pass through subdued despite significant depreciation since 2011 Q1.
- Retailers earned sizable profits while unit labor costs have been contained (Unit Labor Cost y/y percentage change; Retail Corporate Profitability percent).
- Inflation expectations have been well anchored near the ceiling of the target band.
- The SARB tightened policy by 200 bps since December 2013.
- Markets expect the SARB to keep the policy rate stable (Apr-2017 reference).

### External Sector, Trade, and Competitiveness
- The current account deficit remained large despite an improving trade balance.
- REER depreciation has recently turned around; competitiveness remains a challenge.
- Net export volumes improved in 2016, supporting the overall balance.
- The current account deficit is financed by non-FDI flows.
- Global Competitiveness Scores, 2016/17 shown across pillars (1-7 scale) with South Africa compared to EM median.
- Change in net exports decomposed into contributions from prices and volumes; net exports and exports/imports series shown through 2016.
- Current Account Balances (Percent of GDP) compared across countries for Average 2006-15 and 2016.

### Trade and FDI Integration
- South Africa’s trade linkages have steadily increased and are significant with sub-Saharan Africa.
- Exports and imports of goods and services are shown as percent of GDP (series from 1985–2015).
- South Africa is integrated in value-added chains (Export Share by Production Stage, 2015: Intermediate goods, Raw materials, Consumer goods, Capital goods, Others).
- South Africa has become increasingly integrated in FDI, partly reflecting valuation gains on investment in China.
- Assets and liabilities of FDI and BoP flows are presented as percent of GDP.

### Corporate Sector
- Corporate sector profitability has remained healthy despite economic weakening.
- Profitability weakened in manufacturing and mining; steel and agriculture started to strengthen.
- Corporate leverage has risen though it remains below that in peers (Non-Financial Corporate Leverage, 2015: Debt-to-equity percent).
- Corporate debt has increased but does not stand out relative to other emerging market economies (Non-Financial Corporate Debt, Percent of GDP).
- Stock performance indices (JSE All-Share Index; JSE/FTSE Resources 10) tracked from Jan 2007 = 100 through Jan 2017.
- Non-Financial Corporate Leverage and leverage ratios (debt-to-equity, debt-to-assets, debt-to-sales) are shown through 2016.

### Financial Sector and Markets
- Banking sector fundamentals improved (Risk-weighted capital adequacy ratio, NPL ratio, RoE shown as percent).
- Bank stocks outperformed the JSE index (Equity Market Performance index: January 1, 2016 = 100).
- SARB rate hike boosted interest income to total income; interest income share and SARB repo rate change shown.
- Large cumulative equity and bond inflows began to reverse, particularly for equities (Cumulative Portfolio Flows in billions of U.S. dollars).
- Bond yields are elevated, reflecting sizable credit spreads; 10Y SAGB Yield and CDS spreads tracked (bps).
- CDS spreads have been on the high side even by sub-investment grade standards (5Y CDS Spread; credit rating averages as of May 24, 2017).
- Government bond yields have been less volatile than in other key emerging markets; 10-Year Government Bond Yield percent series shown (Mar 17).
- The 1-year JIBAR is well above the repo rate (JIBAR and SARB Policy Rate percent series).
- Stock market uncertainty has declined from relatively high levels (Rand 1-year Implied Vol; JSE Equity VIX percent; Apr 17).

### Corporate Balance Sheets and Vulnerabilities
- South African corporations are highly profitable though corporate financial health has weakened.
- Some sectors could face difficulties in meeting payments which could hamper growth (Interest Coverage Ratio; threshold assumed at 2).
- Liquidity has worsened somewhat and weakening credit growth weighs on the outlook.
- Fixed investment volume, credit to the private sector, and loans and advances to corporations shown as percent year-on-year.
- Sectoral shares in gross value added, 2016 presented by sector (percent of total gross value added).

### External Debt
- Gross external debt does not stand out relative to other EMs.
- Public sector external debt has risen.
- The debt increase has largely been of long-term maturity.
- Non-financial sector external debt compares well relative to peers but has increasingly been of short-term nature.
- A large share of external non-financial sector debt is due within one year.
- Breakdown of external debt by sector and by maturity and instrument presented as percent of four-quarter rolling sum of quarterly U.S. dollar GDP (series through Mar-2016).
- Decomposition of non-financial sector external debt by currency and remaining maturity (data as of 2016Q4).

*International Monetary Fund, South Africa chapter (figures and data as presented).*

### 13.6 percent of GDP

### cr17189 - 13.6 percent of GDP

### Overview and key diagnostic findings
- Stepped up consolidation efforts in recent years kept the fiscal deficit broadly stable as revenue buoyancy largely offset the increasing expenditure ratio.
- The increasing wage bill—driven in part by public wage agreements that have yet to adjust to weaker growth—has contributed to rising expenditure pressures.
- GDP growth has been consistently revised down in budget documents, making debt stabilization challenging.
- There are sizable and growing fiscal risks that complicate fiscal consolidation and debt dynamics.

### Fiscal consolidation, balances, and public debt
- Planned Fiscal Consolidation (percent of fiscal year GDP, unless otherwise stated): 2015/16, 2016/17, 2017/18, 2018/19 (illustrated in figures; consolidation is a mix of revenue increases and expenditure reductions).
- Consolidated government (fiscal year basis April 1–March 31) selected figures (in billions of Rand and percent of GDP):
  - Total revenue and grants (Auth./Staff): 2012/13: 893.6 (26.9), 2013/14: 992.1 (27.5), 2014/15: 1,083.5 (28.0), 2015/16: 1,178.6 (28.6), 2016/17: 1,280.5 (29.0)/1,274.5 (28.9), 2017/18: 1,396.8 (29.5)/1,376.1 (29.2), 2018/19: 1,522.0 (29.7)/1,486.2 (29.5), 2019/20: 1,651.2 (29.8)/1,610.7 (29.7)
  - Total expenditure: 2012/13: 1,043.4 (31.4), 2013/14: 1,143.4 (31.7), 2014/15: 1,233.5 (31.9), 2015/16: 1,364.2 (33.1), 2016/17: 1,445.2 (32.8)/1,447.2 (32.8), 2017/18: 1,563.1 (33.0)/1,567.1 (33.3), 2018/19: 1,677.1 (32.7)/1,681.1 (33.4), 2019/20: 1,814.3 (32.7)/1,822.7 (33.6)
  - Current expenditure (consolidated): e.g., Wages and salaries: 376.3 (11.3) in 2012/13 rising to 631.1 (11.6) in 2019/20 (Auth./Staff where specified)
  - Interest expenditure (in billions and percent of GDP): 93.3 (2.8) in 2012/13; 206.4 (3.7) Auth. / 214.8 (4.0) Staff in 2019/20
  - Primary balance (in billions and percent of GDP): 2012/13: -56.6 (-1.7); 2015/16: -11.4 (-0.3) Auth. / -17.4 (-0.4) Staff; 2017/18: 3.0 (0.1) Auth. / -17.7 (-0.4) Staff; 2019/20: 43.3 (0.8) Auth. / 2.8 (0.1) Staff
  - Overall balance (in billions and percent of GDP): 2012/13: -149.8 (-4.5); 2015/16: -164.7 (-3.7) Auth. / -172.7 (-3.9) Staff; 2017/18: -166.3 (-3.5) Auth. / -191.0 (-4.1) Staff; 2019/20: -163.1 (-2.9) Auth. / -212.0 (-3.9) Staff
  - Gross government debt (billions and percent of GDP): 2012/13: 1,366 (41.1); 2013/14: 1,585 (43.9); 2014/15: 1,799 (46.5); 2015/16: 2,019 (49.0); 2016/17: 2,238 (50.7)/2,238 (50.8); 2017/18: 2,478 (52.3)/2,502 (53.1); 2018/19: 2,713 (52.9)/2,778 (55.1); 2019/20: 2,905 (52.4)/3,038 (56.0)
- Structural balance (percent of potential GDP): 2013: -1.5; 2014: -1.1; 2015: -0.6; 2016: -0.8; 2017: n.a./0.1; 2018: n.a./0.2; 2019: n.a./0.6; 2020: n.a./0.6 (table entries reflect reporting gaps and staff/author differences)
- Memorandum items:
  - National budget primary balance (percent of GDP): ranges from -2.7 (2012/13) to 0.0 and -0.8 in projections for 2019/20.
  - National budget overall balance (percent of GDP): -5.4 (2012/13) to -4.6 (2019/20).
  - Fiscal year GDP (billions of rand): e.g., 2012/13: 3,320; 2019/20 projection: 5,420.

### Macroeconomic projections and labor market
- National income, prices, growth, and labor market projections:
  - Nominal GDP (2016, billions of US dollars): 29516.6
  - GDP per capita (2016, in US dollars): 52725.0
  - Population total (2016, million): 55.951.3 (note: source content appears to show two numbers juxtaposed)
  - Real GDP (annual percent): 2013: 2.5; 2014: 1.7; 2015: 1.3; 2016: 0.3; 2017: 1.0; 2018: 1.2
  - Real GDP per capita: 2013: 0.9; 2014: 0.1; 2015: -0.3; 2016: -1.3; 2017: -0.6; 2018: -0.5
  - Real domestic demand: 2013: 3.2; 2014: 0.4; 2015: 1.7; 2016: -0.7; 2017: 0.7; 2018: 1.2
  - GDP deflator: 2013: 6.1; 2014: 5.8; 2015: 5.0; 2016: 6.8; 2017: 5.8; 2018: 5.7
  - CPI (annual average): 2013: 5.8; 2014: 6.1; 2015: 4.6; 2016: 6.3; 2017: 5.7; 2018: 5.6
  - Unemployment rate (percent of labor force, annual average): (listed as an indicator; specific values appear elsewhere in source tables)
- Wage bill and labor compensation dynamics:
  - Wage bill as a percent of GDP (RHS in figure), wage bill growth, employment growth, and average compensation growth show rising wage pressures; specific series illustrated for 2012/13–2016/17 with wage bill share around 11.0–11.6 percent of GDP across years shown.
- GDP growth revisions in the budget: multiple revisions by year (2012–2016) are illustrated showing consistent downward revisions in recent years.

### Balance of payments and external sector
- Current account and external position (in billions of U.S. dollars and percent of GDP):
  - Balance on current account (US$ billion): 2013: -21.6; 2014: -18.7; 2015: -14.0; 2016: -9.6; 2017: -9.6; 2018: -11.1; 2019: -12.5; 2020: -13.1; 2021: -13.7; 2022: -14.2
  - Current account (percent of GDP): 2013: -5.9; 2014: -5.3; 2015: -4.4; 2016: -3.3; 2017: -3.0; 2018: -3.4; 2019: -3.7; 2020: -3.7; 2021: -3.8; 2022: -3.8
  - Exports of goods and services (US$ billion): 2013: 113.3; 2014: 109.6; 2015: 96.4; 2016: 89.4; 2017: 95.0; 2018: 96.4; 2019: 99.2; 2020: 103.0; 2021: 107.3; 2022: 112.1
  - Imports of goods and services (US$ billion): 2013: -122.0; 2014: -115.7; 2015: -99.9; 2016: -89.0; 2017: -93.3; 2018: -96.2; 2019: -100.0; 2020: -104.0; 2021: -108.4; 2022: -113.2
  - Gross reserves (end of period, US$ billion): 2013: 49.6; 2014: 49.1; 2015: 45.8; 2016: 47.4; 2017: 47.4; 2018–2022: 47.4 (projected)
  - Gross reserves (percent of short-term debt, residual maturity): 2013: 125.9; 2014: 100.5; 2015: 106.9; 2016: 104.4; 2017: 101.3; 2018: 93.3; 2019: 82.4; 2020: 85.4; 2021: 83.8; 2022: 81.3
  - Total external debt (percent of GDP): 2013: 37.2; 2014: 41.3; 2015: 39.1; 2016: 48.5; 2017: 45.2; 2018: 46.2; 2019: 47.0; 2020: 47.6; 2021: 48.1; 2022: 49.0
  - Total external debt (US$ billion, memorandum): 2013: 37.2; 2014: 41.3; 2015: 39.1; 2016: 48.5; 2017: 45.2; 2018: 46.2
  - Total external debt (percent of export earnings): 2012: 114.6; 2013: 113.8; 2014: 132.4; 2015: 128.7; 2016: 159.8; 2017: 151.2
  - External interest payments (percent of export earnings): 2012: 4.4; 2013: 4.9; 2014: 5.2; 2015: 6.9; 2016: 6.3; 2017: 7.4
  - External amortization payments (percent of export earnings): 2012: 29.4; 2013: 39.9; 2014: 36.0; 2015: 50.7; 2016: 47.9; 2017: 47.7

### Monetary, financial soundness, and market indicators
- Monetary Survey (billions of rand; annual percentage change where noted):
  - Broad Money: 2012: 2,373; 2013: 2,514; 2014: 2,697; 2015: 2,975; 2016: 3,157; 2017 (Est.): 3,372
  - Broad money growth (annual percent): 2012: 5.2; 2013: 5.9; 2014: 7.3; 2015: 10.3; 2016: 6.1; 2017: 6.8
  - Monetary base: 2012: 174; 2013: 191; 2014: 205; 2015: 224; 2016: 240; 2017 (Proj.): 257
  - Credit to private sector (annual percent change): 2012: 9.3; 2013: 6.6; 2014: 7.2; 2015: 8.3; 2016: 5.6; 2017: 4.8
- Financial Soundness Indicators (selected, percent unless otherwise indicated):
  - Risk-weighted capital adequacy ratio: 2012: 15.9; 2013: 15.6; 2014: 14.8; 2015: 14.2; 2016: 15.9; 2017: 16.1
  - Tier 1 capital (percent): 2012: 14.0; 2013: 14.1; 2014: 13.6; 2015: 13.8; 2016: 14.5; 2017: 14.6
  - Nonperforming loans (percent of outstanding loans): 2012: 4.0; 2013: 3.6; 2014: 3.2; 2015: 3.1; 2016: 2.9; 2017: 2.4
  - Return on assets: 2012: 1.5; 2013: 1.4; 2014: 1.4; 2015: 1.5; 2016: 1.7; 2017: 1.7
  - Liquidity: Liquid assets (percent of total assets) 2012: 16.2; 2013: 16.6; 2014: 17.6; 2015: 17.7; 2016: 16.0; 2017: 13.9
  - Household debt (percent of GDP): 2012: 47.7; 2013: 46.3; 2014: 45.8; 2015: 46.2; 2016: 43.5
  - Household debt (percent of disposable income): 2012: 76.3; 2013: 78.8; 2014: 77.8; 2015: 77.8; 2016: 73.4
  - Household debt service (percent of disposable income): 2012: 7.7; 2013: 8.6; 2014: 9.3; 2015: 9.7; 2016: 9.5
- Financial market indicators and yields:
  - 3-month Treasury bill interest rate (percent): January–May 2017 average indicated as 5.1–7.4 range in table notes; 91 day Treasury bill yield (percent, end-period): 2012: 5.3; 2013: 5.1; 2014: 5.8; 2015: 6.1; 2016: 7.2; 2017: 7.4
  - Government bond yield (10-year, percent) and repo rate (percent, end-period) reported in national data series (referenced in tables).

### Indicators of external vulnerability and risks
- External indicators and vulnerabilities:
  - Current account improved from -5.9 percent of GDP in 2013 to around -3.0 percent in 2017 but projected to widen modestly thereafter to about -3.8 percent by 2022.
  - Gross international reserves (US$ billion): 2012: 50.7; 2013: 49.6; 2014: 49.1; 2015: 45.8; 2016: 47.4; 2017 (April data): 46.7
  - Gross reserves in months of prospective imports of goods and services: 2012: 5.0; 2013: 5.1; 2014: 5.9; 2015: 6.2; 2016: 6.1; 2017: 5.8
  - Net international reserves (billions of U.S. dollars): 2012: 47.9; 2013: 45.5; 2014: 42.7; 2015: 40.7; 2016: 40.8; 2017: 41.7
  - Exchange rate (Rand/U.S. dollar, period average): 2012: 8.2; 2013: 9.7; 2014: 10.8; 2015: 12.8; 2016: 14.7; 2017 (Jan–Apr average): 13.3
  - Real effective exchange rate (annual percentage change, period average): 2012: -5.4; 2013: -10.5; 2014: -6.3; 2015: -0.6; 2016: -7.3; 2017: n.a.
- Financial market flows and indicators:
  - Stock market index (end-period): 2012: 39,250; 2013: 46,256; 2014: 49,771; 2015: 50,694; 2016: 50,654; 2017 (Apr): 53,817
  - Net purchases of bonds and shares by nonresidents show variability, including periods of net selling.

### Policy implications and priorities identified in the content
- Maintain and steady fiscal consolidation to stabilize public debt dynamics given low growth and rising expenditure pressures.
- Address the wage bill trajectory: align public wage agreements with weaker growth to contain current expenditure growth.
- Strengthen fiscal risk management to mitigate sizable and growing contingent liabilities (including SOE Debt and local government debt) that complicate debt stabilization.
- Preserve external buffers: maintain adequate gross reserves relative to short-term debt and imports to reduce external vulnerability.
- Monitor financial sector soundness indicators (capital adequacy, asset quality, liquidity) given household debt levels and evolving macro conditions.

*Sources: National Treasury, South African Reserve Bank, Haver, Bloomberg, World Bank, and IMF staff estimates and projections.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### South Africa — Overall Assessment
- Overall Assessment: The external position in 2016 was moderately weaker than implied by fundamentals and desirable policy settings.  
- Foreign asset and liability position and trajectory:
  - Valuation effects led to NIIP improvement from -8 percent of GDP at end-2014 to 16 percent of GDP at end-2015; NIIP moderated to 3.6 percent of GDP as of end-2016.
  - External assets were equivalent to 131 percent of GDP and external liabilities to 128 percent of GDP as of end-2016.
  - For FDI, liabilities were 43 percent of GDP and assets were 55 percent of GDP as of end-2016.
  - Gross external debt rose to 48.5 percent of GDP at end-2016 from 26 percent of GDP at end-2008.
  - Short-term external debt (residual maturity) amounted to 15½ percent of GDP.
- Assessment of risks and mitigating factors:
  - Large gross external liabilities pose risks.
  - Mitigating factors include the large external asset position and sizable rand-denominated share of external debt (about half of total external debt).
- Potential policy responses to improve external position:
  - Speed up external adjustment, improve competitiveness, increase employment and savings.
  - Foster entry into key product markets such as power generation, transportation, and telecommunications.
  - Upgrade infrastructure and education/skills; promote greater financial inclusion.
  - Reduce policy uncertainty and preserve government debt sustainability.
  - Accelerate labor and product market reforms to attract durable foreign inflows such as FDI.
  - Seize large FDI inflow transactions to build up reserves and strengthen FX liquidity buffers.

### Current Account
- Background:
  - CA deficit narrowed to 3.3 percent of GDP in 2016 from 4.4 percent in 2015 owing to an improved trade balance as domestic demand growth weakened.
  - CA deficit projected to further narrow to 3 percent of GDP in 2017 as the trade balance strengthens.
- Assessment and CA gap estimates:
  - CA regression model estimates a CA norm of -0.8 percent of GDP, implying a CA gap of -2.4 percent of GDP for 2016.
  - ES approach estimates an NFA-stabilizing CA of -1.4 percent of GDP and a CA gap of -2.2 percent of GDP.
  - Staff assesses the overall CA gap to be somewhat narrower because:
    - Policy uncertainty is expected to unwind after key elections.
    - Net transfers to other members of the Southern African Customs Union (SACU) (not accounted for in the regression) reduce the CA balance.
  - Combined with estimation uncertainty, staff assesses the cyclically adjusted CA to be ½–2½ percentage points of GDP weaker than implied by fundamentals and medium-term desirable policy settings—broadly as assessed in 2015.

### Real Exchange Rate (REER)
- Background:
  - The CPI-REER depreciated by 7 percent on average in 2016 relative to 2015.
  - As of March 2017, the REER had appreciated 19 percent relative to the 2016 average.
- Assessment:
  - REER approaches point to undervaluation between 13 percent (level approach) and 29 percent (index approach) based on the 2016 REER-average.
  - Gauging the appropriate REER for South Africa is challenging due to structural changes since 1994; staff places greater weight on CA approaches.
  - For CA approaches, the estimated CA/REER elasticity applied to the CA gap points to overvaluation of between 2 and 9 percent.
  - Combining methods, staff assesses a REER overvaluation of 0–10 percent for 2016, broadly consistent with the CA gap.

### Capital and Financial Accounts: Flows and Policy Measures
- Background and flows:
  - Net FDI flows were -0.4 percent of GDP in 2016, down from -1.3 percent of GDP in 2015.
  - Portfolio investment picked up markedly to 5.9 percent of GDP in 2016, financing the CA deficit.
  - Gross external financing needs stood at 18 percent of GDP in 2016.
- Assessment:
  - High reliance on non-FDI flows and high nonresident holdings of local financial assets pose risks.
  - Mitigating factors include a floating exchange rate, nonresident portfolio holdings mainly denominated in local currency, and a large domestic institutional investor base.

### FX Intervention and Reserves Level
- Background:
  - South Africa has a floating exchange rate regime; foreign exchange intervention is rare.
  - Reserves cover six months of imports.
  - Reserves are below the IMF’s composite adequacy metric: 77 percent of the metric without considering capital flow management measures and 84 percent of the metric after considering them.
- Assessment:
  - As conditions allow, reserve accumulation is desirable to strengthen the external liquidity buffer, subject to maintaining the primacy of the inflation objective.

### Technical Background Notes (selected)
- Note 1: Of the 128 percent of GDP in total external liabilities as of end-2016, 51 percent were portfolio investment liabilities, 34 percent were direct investments, and the remaining 15 percent were financial derivatives and other investments. Total external assets amounted to 131 percent of GDP as of end-2016, of which 42 percent were direct investments, 36 percent were portfolio investment assets, 11 percent were reserve assets, and the remaining 11 percent were financial derivatives and other investment assets.
- Note 2: The CA gap presented here results from the CA regression and External Sustainability (ES) approaches as well as staff’s judgment.
  - Net current transfers related to SACU are not accounted for in the regression model and warrant an adjustment of the estimated CA gap.
  - 0.3 percentage points of GDP of the improvements in the CA norm since 2014 are attributable to a worsening of the indicator of perceived political uncertainty and institutional quality, assessed to be temporary and expected to unwind following the December 2017 elections.
  - Considering the uncertainty (standard deviation of 0.9 percent of GDP), staff believes the regression-based CA gap is smaller than the model suggests.
  - The ES approach compares the medium-term CA with the one that would stabilize South Africa’s net foreign assets at its EM peers’ benchmark (-35 percent of GDP); stabilizing at this level would require a CA deficit of -1.4 percent of GDP, compared to staff’s medium-term projection of a CA deficit of below 4 percent of GDP, yielding a CA gap of -2.2 percent of GDP.
  - Overall, model-based CA gaps for 2016 range from -2.2 to -2.4 percent of GDP; staff judges the CA gap to be between ½ and 2½ percentage points of GDP.
- Note 3: EBA REER regressions (using the CPI-based REER) point to undervaluation for 2016; however, REER regression models may be biased given the changing REER baseline pre- and post-2000.
- Note 4: Using staff’s CA gap range and a long-run elasticity estimate of 0.27 suggests a REER overvaluation of 2–9 percent; considering uncertainties and REER-regression results, staff assesses REER overvaluation in the order of 0–10 percent.

*International Monetary Fund — Annex I. External Sector Assessment (cr17189).*

### Annex III. Exchange Rate Pass-through to Core Inflation

### Annex III. Exchange Rate Pass-through to Core Inflation in South Africa

### Summary findings
- Exchange rate pass-through to core inflation in South Africa seems to have moderated in recent years.
- Long-run exchange-rate pass-through (LRERPT) in the past few years was 10–15 percent.
- When estimated recursively with 10-year rolling windows, both models yielded similar LRERPT for the past few years of 10–15 percent.
- Results differed for earlier years:
  - Using model A (error-correction approach), LRERPT was stable, at 10 percent.
  - Using model B (first-differences model), LRERPT was 25 percent through 2013, but subsequently fell to 10 percent when observations in 2003–04 dropped out of the sample.
- Disinflation of producer prices in countries from which South Africa imports goods and services could have played some role in moderating pass-through.

### Methodology
- Two approaches were used to estimate long-run exchange-rate pass-through (LRERPT):
  - Error-correction approach (ECM, model A), drawing on Kabundi and Mbelu (2016) and IMF (2016). Diagnostic tests for co-integration amongst included variables yielded mixed results, which undermined the co-integration assumption underpinning ECM.
  - A model in first differences and without implied co-integration constraints (model B), drawing on BIS (2016).
- Estimation sample and controls:
  - Core inflation from 2002Q1 to 2016Q4 was regressed on NEER, while controlling for producer prices in foreign countries and domestic unit labor costs.
  - NEER and foreign producer price inflation were import-weighted.
  - In model B, data were in quarter-on-quarter percent changes.
- In the BIS-style model, LRERPT is the sum of coefficients on lagged NEER depreciation (4 lags) divided by 1 minus the coefficient on lagged core inflation.

### Estimated effects and dynamics
- LRERPT measured by both models in recent years: 10–15 percent.
- Model-specific histories:
  - Model A: LRERPT stable at 10 percent over earlier years.
  - Model B: LRERPT was 25 percent through 2013, then fell to 10 percent after 2003–04 observations dropped out.
- Visual evidence (as described):
  - The impact of nominal effective exchange rate (NEER) depreciation (red line, top chart) on core inflation (broken blue line) may have weakened during the 2010s as the two variables co-moved to a lesser extent than in earlier years.
  - Core inflation, foreign price inflation, and NEER depreciation series are depicted (percent), with NEER depreciation on a right-hand scale.

### Comparisons with prior studies
- LRERPT using model A was similar to those in Kabundi and Mbelu (2016) and IMF (2016).
- The estimates in this Annex were lower because a different measure of core inflation, shorter but publicly available, was used.
- LRERPT using model B was broadly consistent with BIS (2016) estimated for a panel of emerging economies.

*Source: IMF staff estimates.*

### 5. South African banks’ performance is interlinked with regional economies’ growth in

### 5. South African banks’ performance is interlinked with regional economies’ growth in

### Banks and regional growth
- Re-estimation of the benchmark model replacing domestic growth with regional economies’ growth (ex-South Africa) in which one large bank operates yields:
  - A one percentage point decline in regional growth would lead to a 1–2 percentage point reduction in credit and deposit growth.
  - A one percentage point increase in the NPL ratios would dampen regional growth by 0.5 percentage point after 4 quarters.
  - A 10-percentage point reduction in deposit growth would dampen GDP growth by 0.2 percentage point.
- These findings are comparable to those for other emerging economies, including Indonesia (IMF Country Report 16/82, 16/218).

### Annex VII — Public Debt Sustainability Analysis (DSA): baseline and sensitivity
- DSA conclusion:
  - Government debt-to-GDP ratio is sustainable in the baseline scenario but highly sensitive to shocks.
  - Persistent low growth or a shock to contingent liabilities could push gross financing needs and debt level above high-risk benchmarks of 15 and 70 percent of GDP, respectively.
  - Under a standard combination of macro-fiscal shocks, gross financing needs and the debt level could increase significantly to slightly above 15 percent of GDP and 67 percent of GDP, respectively.
- Policy implication: limited room for policy response to further adverse shocks; urgent need for reforms to increase economic growth and reduce contingent liabilities, especially from state-owned enterprises (SOEs), to increase resilience to shocks.

### Data coverage (DSA)
- Fiscal assumptions are based on the national government’s main budget (central government); excluded: provincial governments, social security funds, extra-budgetary institutions (these entities are not allowed to incur debt).
- Municipalities may incur debt but most provincial and municipal expenditure is funded through national transfers and thus largely captured.
- SOEs are excluded from baseline debt coverage though a contingent-liabilities scenario covers guarantees being called.
- Total contingent liabilities are estimated at 18 percent of GDP at end March 2017:
  - SOE loan related guarantees account for 56 percent of total contingent liabilities (10 percent of GDP).
  - Remaining contingent claims (road accident fund, post-retirement medical assistance for public employees, claims against government departments, public-private partnerships, and other guarantees to entities that are not SOEs) largely account for the remaining 8 percentage points of GDP.

### Macroeconomic assumptions
- Real GDP growth projections:
  - 2016: 0.3 percent.
  - 2017: improve to 1.0 percent (drivers: better rainfall, increase in mining output from a moderate rebound in commodity prices, prospects for lower number of days lost due to strikes).
  - Medium term: growth projected at 2.2 percent as consumption and investment recover and the output gap closes.
- Inflation assumptions:
  - GDP deflator inflation expected to average 5.6 percent in 2017–2022.
  - CPI inflation expected close to the upper range of the South Africa Reserve Bank’s (SARB) 3–6 percent target range.

### Fiscal assumptions
- FY2017/18 national government primary fiscal deficit projected at 0.8 percent of GDP (from a deficit of 0.9 percent of GDP in FY2016/17) due to fiscal measures in the 2016 and 2017 Budget Reviews (assumed to have the same yield as in the Budget Reviews).
- Primary deficit expected to continue improving over the medium term because of additional fiscal measures and gradual growth improvement.
- Expected path for debt:
  - Debt-to-GDP ratio not expected to stabilize before 2019; will reach about 56 percent of GDP by then.
- Projection mechanics and assumptions:
  - Include stock-flow adjustments for discounts on new issuance of existing benchmark bonds and valuation effects on inflation-linked bonds.
  - Assume no additional fiscal measures beyond those signaled in the 2016 and 2017 budgets.
  - Contingency reserves averaging 0.2 percent of GDP for each fiscal year starting with FY 2017/2018.
  - Continuation of historical budget expenditure and financing trends for years after FY 2019/2020 for which budget projections are not available.

### Risks to the fiscal outlook
- Upward pressures on the fiscal deficit could stem from:
  - Lower-than-anticipated growth.
  - Higher borrowing costs.
  - Possible sources of spending pressures (examples listed): rapid procurement of nuclear energy, national health insurance, free university tuition, a potentially generous new public wage settlement in 2018.
  - Weak state of some SOEs’ balance sheets potentially triggering calls for additional government support.

### Forecast track record and fiscal adjustment
- Forecast errors and risks:
  - Between 2007–15, the median real GDP forecast error was -1.2 percentage points, broadly in line with other surveillance countries.
  - Neither the primary balance nor GDP inflation projections were systematically biased; persistent over-projection of real GDP growth poses an upside risk to the debt-to-GDP forecasts.
- Fiscal adjustment experience and comparison:
  - Fiscal consolidation starting with the 2013 Budget reduced the national government deficit from 5.4 percent of GDP in FY2012/13 to 4.2 percent of GDP in FY2016/17.
  - National government primary deficit adjusted from 2.7 percent in FY2012/13 to 0.9 percent in FY2016/17 due to rising interest costs.
  - The maximum three-year adjustment in the cyclically-adjusted primary balance over the projection period is 1.2 percent of GDP; the maximum three-year average level of the cyclically-adjusted primary balance is 1.2 percent of GDP — both well below market access country experience thresholds of 3 and 3.5 percent of GDP respectively.

### Heat map, vulnerabilities, and mitigating factors
- Heat map highlights:
  - South Africa faces risks from lower growth and contingent liabilities; either could push gross financing needs and the debt level above high-risk benchmarks, indicating increased risk of financing difficulties and debt distress.
- Other risk indicators:
  - Elevated bond spreads, large external financing requirements, and the share of debt held by non-residents point to risks.
- Risk mitigants:
  - Large domestic institutional investor base.
  - Low share of foreign currency and short-term debt.

*International Monetary Fund*

### 8. The DSA framework suggests South Africa’s government debt-to-GDP ratio is sustainable in

### 8. The DSA framework suggests South Africa’s government debt-to-GDP ratio is sustainable in

### Baseline assessment
- Under the baseline, the debt-to-GDP ratio is projected to increase to 57 percent by 2022, significantly below the 70 percent high-risk threshold.
- Gross financing needs are estimated at 11.4 percent of GDP in 2016 and are expected to remain at similar levels during the projection period.
- Such gross financing needs levels are relatively high compared to other EMs average despite a favorable maturity and currency structure.

### Key baseline projections and indicators (as of May 31, 2017; figures in percent of GDP unless otherwise indicated)
- Nominal gross public debt: 2015 = 35.6; 2016 = 49.3; 2017 = 51.7; 2018 = 52.6; 2019 = 54.7; 2020 = 55.9; 2021 = 56.5; 2022 = 56.9; projection for 2022 listed also as 57.0.
- Public gross financing needs: 2015 = 7.9; 2016 = 11.2; 2017 = 11.4; 2018 = 11.2; 2019 = 11.4; 2020 = 11.7; 2021 = 11.6; 2022 = 11.4; 2022 final = 11.1.
- Real GDP growth (in percent): 2015 = 2.8; 2016 = 1.3; 2017 = 0.3; 2018 = 1.0; 2019 = 1.2; 2020 = 1.7; 2021 = 2.2; 2022 = 2.2; 2022 repeated = 2.2.
- Inflation (GDP deflator, in percent): 2015 = 6.8; 2016 = 5.0; 2017 = 6.8; 2018 = 5.8; 2019 = 5.7; 2020 = 5.6; 2021 = 5.6; 2022 = 5.6; 2022 repeated = 5.6.
- Nominal GDP growth (in percent): 2015 = 9.8; 2016 = 6.4; 2017 = 7.1; 2018 = 6.8; 2019 = 6.9; 2020 = 7.4; 2021 = 7.9; 2022 = 7.9; 2022 repeated = 7.9.
- Effective interest rate (in percent): 2015 = 8.3; 2016 = 6.8; 2017 = 7.0; 2018 = 7.2; 2019 = 7.4; 2020 = 7.4; 2021 = 7.5; 2022 = 7.6; 2022 repeated = 7.6.
- Sovereign spreads: EMBIG (bp) = 638; 5Y CDS (bp) = 190.
- Change in gross public sector debt (annual): 2015 = 1.5; 2016 = 2.4; 2017 = 2.4; 2018 = 0.9; 2019 = 2.1; 2020 = 1.2; 2021 = 0.6; 2022 = 0.4; cumulative = 0.1; cumulative over projection horizon = 5.3.
- Identified debt-creating flows: 2015 = 2.0; 2016 = 4.9; 2017 = 2.2; 2018 = 0.4; 2019 = 1.9; 2020 = 1.0; 2021 = 0.4; 2022 = 0.2; 2022 repeated = 0.0; cumulative = 3.8.
- Primary deficit: 2015 = 0.8; 2016 = 1.8; 2017 = 1.4; 2018 = 0.9; 2019 = 0.8; 2020 = 0.8; 2021 = 0.7; 2022 = 0.4; 2022 repeated = 0.1; cumulative = 3.6.
- Primary (noninterest) revenue and grants (percent of GDP): 2015 = 24.3; 2016 = 24.8; 2017 = 25.4; 2018 = 25.6; 2019 = 25.9; 2020 = 26.0; 2021 = 26.0; 2022 = 26.1; cumulative = 155.7.
- Primary (noninterest) expenditure (percent of GDP): 2015 = 25.1; 2016 = 26.6; 2017 = 26.7; 2018 = 26.4; 2019 = 26.6; 2020 = 26.8; 2021 = 26.7; 2022 = 26.5; cumulative = 159.3.
- Automatic debt dynamics contribution: 2015 = -0.2; 2016 = 1.7; 2017 = -0.7; 2018 = 0.2; 2019 = 0.2; 2020 = 0.0; 2021 = -0.2; 2022 = -0.2; cumulative = -0.2; overall = -0.1.
- Interest rate/growth differential: 2015 = -0.5; 2016 = 0.2; 2017 = 0.0; 2018 = 0.2; 2019 = 0.2; 2020 = 0.0; 2021 = -0.2; 2022 = -0.2; cumulative = -0.2; overall = -0.1.
  - Of which: real interest rate contribution: 2015 = 0.4; 2016 = 0.8; 2017 = 0.1; 2018 = 0.7; 2019 = 0.8; 2020 = 0.9; 2021 = 0.9; 2022 = 1.0; cumulative = 1.0; overall = 5.2.
  - Of which: real GDP growth contribution: 2015 = -0.9; 2016 = -0.6; 2017 = -0.1; 2018 = -0.5; 2019 = -0.6; 2020 = -0.9; 2021 = -1.1; 2022 = -1.2; cumulative = -1.2; overall = -5.4.
- Other identified debt-creating flows: 2015 = 1.4; 2016 = 1.5; 2017 = 1.5; 2018 = -0.6; 2019 = 0.9; 2020 = 0.2; 2021 = 0.0; 2022 = 0.0; cumulative = 0.0; overall = 0.4.
- Privatization/Drawdown of Deposits: 2015 = 0.7; 2016 = -0.3; 2017 = 1.2; 2018 = -0.9; 2019 = 0.4; 2020 = -0.4; 2021 = -0.7; 2022 = -0.6; cumulative = -0.6; overall = -2.9.
- Stock-Flow adjustment: 2015 = 0.7; 2016 = 1.8; 2017 = 0.3; 2018 = 0.3; 2019 = 0.5; 2020 = 0.6; 2021 = 0.6; 2022 = 0.6; cumulative = 0.6; overall = 3.2.
- Residual, including asset changes: 2015 = -0.5; 2016 = -2.5; 2017 = 0.2; 2018 = 0.4; 2019 = 0.2; 2020 = 0.2; 2021 = 0.2; 2022 = 0.2; cumulative = 0.1; overall = 1.4.
- Debt-stabilizing primary balance (percent of GDP): -0.1.

### Sensitivity to shocks and stress-test results
- If the primary balance failed to improve during the rest of the projection period (constant primary balance scenario), the projected debt level in 2022 would increase to 59 percent of GDP.
- A one-standard-deviation temporary shock to growth in 2018 and 2019 would raise the debt-to-GDP ratio to 62 percent of GDP in 2022.
- A combined macro-fiscal shock—including standard shocks to growth and interest rates, and a primary balance shock (a temporary half of a 10-year historical standard deviation deterioration in the primary balance) and an exchange rate shock (consistent with the maximum movement over the past 10 years and an exchange rate pass-through of 0.25)—results in a sharp increase in the debt-to-GDP ratio to 67 percent of GDP and gross financing needs slightly above the 15 percent high risk threshold.
- A customized persistently low growth scenario, where growth is permanently lower than the baseline by 1 percentage point on average during 2018–2022, and that factors in lower tax revenue elasticities, denominator effects, and a 300 basis points interest rate shock, would result in the debt-to-GDP ratio reaching 71 percent of GDP in 2022.
- A contingent liability shock entailing the calling of all SOE loan guarantees plus the contingent liabilities of the Road Accident Fund would push debt above the high-risk threshold of 70 percent of GDP by 2022. This scenario entails the calling of 78 percent of the government’s contingent liabilities estimated at 13.8 percent of GDP at end of FY2016/17.

### Probabilities and fan-chart results
- Fan charts that incorporate historical volatility of macro-fiscal variables estimate the probability of debt exceeding certain thresholds.
- Under the predominance of asymmetric (downside) shocks, there is a 10 percent chance that the debt-to-GDP ratio could exceed 70 percent of GDP by 2022.
- Under the predominance of symmetric shocks (allowing for upside improvements via structural reforms), the probability of debt exceeding 70 percent of GDP by 2022 is 5 percent.

### Composition of public debt and financing vulnerabilities
- Public gross financing needs are relatively high (e.g., 11.4 percent of GDP in 2016) though the maturity and currency structure are described as favorable.
- Figures show composition by maturity (short-term vs. medium and long-term) and by currency (local currency-denominated vs. foreign currency-denominated), consistent with the narrative that most of the debt stock is in local currency.

### SOE contingent liabilities and fiscal risk
- SOEs’ financial performance has deteriorated, reflected by a downward trend in the return on equity and consistently low levels compared to government borrowing costs.
- SOEs have received 1.2 percent of GDP annually, on average, in the last eight budget years, combining direct transfers, subsidies, and recapitalizations.
- Government guarantees for rapidly growing SOE debt represent 56 percent of all contingent liabilities (10 percent of GDP) at end March 2017.
- The contingent liability scenario described above (calling 78 percent of contingent liabilities estimated at 13.8 percent of GDP at end of FY2016/17) underscores risks to the fiscal outlook and potential impacts on investor confidence and borrowing costs.

*Source: IMF staff (cr17189).*

### 3. International experience suggests that various policies can be deployed to improve the

### 3. International experience suggests that various policies can be deployed to improve the

### Comprehensive inventory and review of SOEs
- Undertake a comprehensive inventory and review of SOEs to identify an appropriate reform strategy for each SOE.
- Gather information on SOEs’ commercial viability and the relevance of their objectives from a public policy perspective to inform subsequent decisions on reform strategy options:
  - (i) transformation into government agencies or budgetary institutions if they are not commercially viable but carry out relevant public policy objectives;
  - (ii) divestment if they are commercially viable but their objectives are not relevant from a public policy perspective;
  - (iii) liquidation if they are not commercially viable and their objectives are not relevant from a public policy perspective;
  - (iv) retaining them as SOE but pursuing reforms to improve their performance if they are both commercially viable and have relevant objectives from a public policy perspective.

### Reforming retained SOEs to improve operational and financial performance
- Countries have pursued the following reform strategies in isolation or combined, depending on country specific circumstances:
  - Broadening the ownership structure to include private sector participation:
    - Models include retaining majority shareholding but implementing corporate governance reforms (e.g., Brazil, China, India, Poland).
    - Maintaining minority shareholding after sale of majority of shares to the private sector (e.g., Brazil, UK, Norway, Spain, Poland).
  - Stepping up monitoring of SOE performance. Reforms include:
    - (a) implementation/enforcement of international accounting and auditing standards, timeliness of accounts, and disclosure and transparency requirements more generally (e.g., Switzerland, Turkey, Germany, Sweden, New Zealand).
    - (b) linking main objectives to a set of key performance indicators measuring financial and non-financial performance, financial risk, and transactions with the government (e.g. Australia, Indonesia, Thailand, South Africa).
    - (c) requiring quantification and budget compensation for quasi-fiscal operations (e.g., EU regulatory framework for the transportation sector).
    - (d) production of consolidated information regarding the SOE sector in annual reports. (e. g. Lithuania, Finland, France, Brazil, New Zealand, Sweden).
  - Leveling the playing field with the private sector by limiting SOE tax, regulatory, and subsidized financing benefits (e.g. Directives on State Aid in EU countries, Australia’s competitive neutrality policy).
  - Balancing increased SOE autonomy with control of fiscal risks. Measures include:
    - increasing professional qualifications of board members and strengthening rules against conflict of interest (e.g., Germany, Italy, Spain, Singapore);
    - reducing board sizes (e.g. Korea, France, Poland, Spain);
    - introducing guidelines for remuneration and employment (Finland, Norway, Sweden, Czech Republic);
    - retaining financial controls (e.g., borrowing/guarantees approval by the Ministry of Finance).
  - Preparing framework laws on SOEs (e.g., Cyprus, New Zealand, the Philippines, and Korea). Important components:
    - clarifying the definition of SOEs;
    - defining clearly the roles and responsibilities of key players such as line ministries and SOE boards;
    - establishing sound SOE corporate governance policies;
    - introducing requirements for the creation/winding down and sale of SOEs;
    - tightening of sanctions for non-compliance with SOE legislation;
    - increased disclosure and reporting requirements for SOEs.
  - Increasing the centralization of the ownership function for SOEs (e.g., Singapore, Denmark, Netherlands, China, Finland, France and Peru) to:
    - separate the ownership function from the policy function;
    - implement unified SOE guidelines and their interpretation;
    - compile and report aggregate information on SOEs;
    - leverage scarce expertise.

### Ownership policy and governance
- Develop and publish a comprehensive ownership policy and review it periodically (e.g., France, Finland, Norway, Sweden and the U.K).
- Key features of ownership policies include:
  - (a) statement of the government’s policy and financial objectives for the entities exercising the ownership function and each company or group of companies and associated with performance indicators;
  - (b) organization of the ownership function, including mandate and main functions of the ownership entity(ies);
  - (c) key policy principles and policies to be followed (e.g., adherence to corporate governance principles).

### Reform sequencing and timeframes
- SOE reforms are generally carried out in stages spanning many years and responding to country specific circumstances.
- Illustrative reform sequence based on complexity of reforms:
  - Short term (first year):
    - (1) Full inventory of public sector entities;
    - (2) Clarification of roles and responsibilities of key players;
    - (3) Simple quantification of quasi-fiscal operations focusing on high fiscal risk SOEs;
    - (4) Simple performance indicators and targets.
  - Medium term (first 3 years):
    - (1) SOE legal framework revision including a possible framework law on SOEs;
    - (2) Development of an ownership policy;
    - (3) Consolidated annual report on all SOEs.
  - Long term (later years):
    - Refinements in:
      - (1) set of performance indicators and targets;
      - (2) full costing, reporting, and compensation of quasi-fiscal operations;
      - (3) periodic reviews of the ownership policy.

*Source: 2017 Budget Review. National Treasury*

### Annex X. Introduction of a National Minimum Wage

### Annex X. Introduction of a National Minimum Wage

### Overview and context
- An agreement was reached in February 2017 among social partners (government, trade unions, and employers’ associations) to establish, for the first time in South Africa, a national minimum wage (NMW). The agreement was informed by extensive consultation and a comprehensive study.
- National minimum wages can improve incomes and well-being for workers currently earning less than the proposed minimum, and aspects of the agreement (not discussed here) aim to reduce the likelihood and duration of strikes.
- Minimum wages can induce some firms that currently pay workers less than the proposed minimum to reduce employment. This annex compares the new NMW internationally and against existing sectoral minimum wages, and analyzes how many workers currently earn less than the NMW by sector.

### Level and modalities
- NMW: R20 per hour (equivalent to $1.35 at market exchange rate at end-2016 or $3.44 at 2016 purchasing power parity).
- Expected monthly translation: R3,500 per month given a mode of 175 hours per month.
- Envisaged effective date: May 2018.
- Transitional lower minima for two sectors upon introduction:
  - Farm workers: R18 (90 percent of NMW).
  - Domestic workers: R15 (75 percent of NMW).
- Transitional exemption expected to last for two years.

### International comparisons
- Common international indicators: (i) minimum-to-median wage ratio, (ii) minimum-to-mean wage ratio, (iii) minimum wage to gross national income (GNI) ratio.
- For South Africa, projected median monthly wage in May 2018: R3,250 (projection obtained by applying a median wage growth rate of 2 percent from 2014 to 2015 to the 2015 median monthly wage of R3,100).
- On the median-based measure:
  - NMW-to-median ratio: 1.08 (the NMW would be slightly above the median wage).
  - An alternative estimate reported by the panel: minimum-to-median ratio of 0.72 (based on 2014 wage distribution excluding agriculture and domestic workers and adjusting median by inflation to May 2018), which would rank South Africa differently.
- On the mean-based measure:
  - Panel’s estimated minimum-to-mean ratio: 0.33.
  - IMF staff computation: 0.36 (ratio between minimum wage and projected mean wage for May 2018).
  - South Africa is among the lowest in the sample by the minimum-to-mean ratio, reflecting large wage inequality and a large gap between median and mean.
- Minimum wage to per capita GNI (2015): South Africa is the highest among the BRICS countries and higher than the majority of countries in the sample (the NMW of R3,500 was converted to 2015 prices using actual CPI inflation in 2016 and projected inflation for 2017 and 2018).

### Comparison with existing wage distribution and sectoral minimum wages
- Overall share of employed workers currently earning less than the proposed NMW: 47.3 percent.
- Sectors with largest shares below the NMW (selected figures):
  - Agriculture: 84.5 percent (Number of Workers within Industry Earning Below R3500: 555,193; Sector total workers: 657,286; Share of Total Number of Workers Earning Below R3500: 4.2%; Share of Total Number of Workers Earning Below R3500 [alternative column]: 8.9%).
  - Private Households: 90.7 percent (Sector total workers: 1,235,770; Number below R3500: 1,120,636; Share of Total Number of Workers Earning Below R3500: 8.5%; Share of Total Number of Workers Earning Below R3500 [alternative column]: 18.0%).
  - Wholesale and Retail Trade: 48.2 percent (Sector total workers: 2,307,491; Number below R3500: 1,112,935; Share of Total Number of Workers Earning Below R3500: 8.5%; Share of Total Number of Workers Earning Below R3500 [alternative column]: 17.9%).
  - Construction: 54.6 percent (Sector total workers: 948,331; Number below R3500: 517,786; Share of Total Number of Workers Earning Below R3500: 3.9%; Share of Total Number of Workers Earning Below R3500 [alternative column]: 8.3%).
  - Manufacturing: 39.7 percent (Sector total workers: 1,565,716; Number below R3500: 622,181; Share of Total Number of Workers Earning Below R3500: 4.7%; Share of Total Number of Workers Earning Below R3500 [alternative column]: 10.0%).
  - Total workers: 13,152,697; Number earning below R3500: 6,218,092; Total share below NMW: 47.3 percent; Share distribution columns sum to 100.0 percent where reported.
- The NMW is above a majority of sectoral minimum wages already in place in South Africa (May 2018 NMW converted to 2016 prices using projected average inflation of 6 percent in 2017–18; domestic workers at 75 percent of NMW; agricultural at 90 percent of NMW).
- Examples of 2016 sectoral minima and SD-to-NMW ratios (NMW adjusted to 2016 prices):
  - Agriculture: R2,789; SD-to-NMW Ratio: 0.96.
  - Forestry: R2,789; SD-to-NMW Ratio: 0.96.
  - Domestic Workers: R1,940–R2,210; SD-to-NMW Ratio: 0.80–0.91.
  - Private Security: R2,212–R6,586; SD-to-NMW Ratio: 0.69–2.04.
  - Wholesale and Retail: R2,690–R6,961; SD-to-NMW Ratio: 0.84–2.16.
  - Taxi: R2,261–R3,232; SD-to-NMW Ratio: 0.70–1.00.
  - Hospitality: R2,954–R3,292; SD-to-NMW Ratio: 0.92–1.02.
  - Contract Cleaners: R3,043–R3,341; SD-to-NMW Ratio: 0.94–1.04.
- Note: Sectoral minimum wages may vary by job subcategory, seniority, etc. Existing sectoral minima are at or below the proposed NMW except for the top end of private security and wholesale and retail trade ranges.

### Compliance rates and informal employment
- International experience: high minimum-to-median wage ratios in non-advanced economies often coincide with significant informal employment and low compliance.
  - Examples cited: informal employment shares of 55 percent (Colombia ILO 2014), 60 percent (Indonesia Rani et al. 2013), 71 percent (Philippines ILO 2014).
  - Estimated compliance rates: 47 percent for Indonesia, 59 percent for the Philippines, 30 percent for Costa Rica (Gindling and Trejos 2010).
- Evidence that higher minimum wages can reduce compliance:
  - Indonesia: 21 percent of regular wage employees received wages below provincial minimum wage in August 2001; non-compliance rose to nearly 40 percent between 2003 and 2008 as minimum wage rose and average wages stagnated.
  - Similar empirical associations documented for Kenya, Nicaragua, and Turkey.
- South Africa specific figures:
  - Informal workers share of total employees: 16.7 percent in 2016Q4 (Quarterly Labor Force Survey).
  - Estimated rate of compliance with minimum wages in formal sector: 55 percent, with an average shortfall of 36 percent of the applicable minimum wage (Bhorat, Kanbur and Mayet 2010, 2012).
- Implication: The impact of introducing the NMW would be mitigated by relatively low compliance rates, which could drop further as applicable minimum wages rise.

### Poverty reduction implications
- The NMW would likely reduce inequality, but its impact on poverty is likely limited:
  - Families in the lowest-income quintile (containing almost one third of the population) earn only 24 percent of their family income, that is R1,671 on average, from wages.
  - Only 36.2 percent of the households in the lowest-income quintile are working households.
  - About 76 percent of the monthly family income of this quintile is from social grants (R1,270).
- Many in the lowest-income quintile work in the informal sector or in sectors with low compliance (agriculture, security, domestic work) and thus are less likely to see wage increases from the NMW.
- Conclusion: The NMW’s effects on reducing poverty for the poorest families should not be overestimated; other policies are needed to make a more significant dent in poverty.

### Impact on employment and other macroeconomic variables
- South African studies indicate fragile sectors (agriculture, domestic work) justify lower minima on introduction:
  - Conradie (2004) using grape farmers: a wage increase of 10 percent will decrease employment by between three and 6 percent.
  - Bhorat, Kanbur and Stanwix (2015) and Garber (2015): after the sectoral minimum wage law in agriculture (2003), wages rose by approximately 17 percent and the probability of employment for a farmer fell by approximately 13 percent in the post-law period.
- Employment elasticity to wage increases depends on factors such as the extent of economic rents accruing to firms; where rents exist, wage increases may shift rents to workers with limited employment effects; in competitive markets, job losses could be more sizable.
- Impact on international competitiveness and government wage bill likely limited because most workers in internationally-traded firms and government already earn above the proposed NMW; no mechanism envisaged to shift entire wage structure in firms or government.

### Policy implications and recommendations
- The NMW level seeks to balance ensuring a reasonable living standard for millions of workers near or below the poverty line and preserving employment levels.
- Risks: The proposed NMW at R20 per hour is on the high side of several comparisons (other countries, sectoral minima, current wage levels for large segments of the labor force), risking adverse employment effects.
- Recommended actions:
  - Closely monitor employment performance after the NMW becomes effective, especially in the most affected sectors.
  - Consider rules-based exemptions beyond those for agriculture and domestic workers—for example, for newly-hired youth—to reduce the possibility of undue employment reductions.
  - If employment performance worsens significantly for small- and medium-sized enterprises, consider introducing complementary measures to provide them with adequate support.

*Source: Annex X. Introduction of a National Minimum Wage (cr17189).*

### 2. The performance of South Africa’s education system lags considerably behind other

### 2. The performance of South Africa’s education system lags considerably behind other countries

### International and regional performance comparisons
- South Africa’s 2015 TIMSS/TIMSS-mapped results place it well below countries with similar education spending in 2015 (examples cited: Romania, Thailand, Tunisia) and below the line-of-best-fit between educational attainment and GDP per capita (Figure A11.2; Figure A11.3).
- The estimated South Africa PISA score is a mapping from the TIMSS score using the methodology of OECD, 2015, Universal Basic Skills.
- South Africa’s basic skills outcomes (mathematics and reading) are similar to, or in some cases significantly worse than, neighboring countries according to SACMEQ evaluations for six-grade students (Table A11.1), despite higher spending per pupil.

### SACMEQ test results (2007 and 2013)
- Learner reading score (selected country entries):
  - Mauritius: 2007 = 574; 2013 = 597; Difference = 23
  - Kenya: 2007 = 543; 2013 = 601; Difference = 58
  - South Africa: 2007 = 495; 2013 = 558; Difference = 63
  - SACMEQ (Average): 2007 = 500; 2013 = 507; Difference = 7
- Learner mathematics score (selected country entries):
  - Mauritius: 2007 = 623; 2013 = 694; Difference = 71
  - Kenya: 2007 = 557; 2013 = 651; Difference = 94
  - South Africa: 2007 = 495; 2013 = 587; Difference = 92
  - SACMEQ (Average): 2007 = 507; 2013 = 584; Difference = 77
- Other country entries and differences appear in Table A11.1 as provided by SACMEQ.

### Resource inputs and equity
- South Africa spends 2-3 times more per pupil than its neighboring countries, yet outcomes lag.
- Education spending is measured in dollars at purchasing-power parity (PPP) in comparative figures.
- Despite the government’s pro-poor school funding policy, resource allocation is uneven:
  - Public schools in urban areas and richer neighborhoods tend to have more resources per pupil than those in poorer areas.
  - These urban/richer schools are sometimes supplemented by private resources.
- Children from low-income families have been exempted from school tuition, but other costs (transport and uniforms) remain burdensome.

### Contributing factors to underperformance
- Legacy of apartheid:
  - Differences in educational attainment across races persist.
  - A sizable share of current teachers received inadequate education under apartheid.
- Uneven distribution of resources between rural and urban areas and between richer and poorer neighborhoods.
- Non-tuition school-related costs remain a barrier for low-income families.

### Economic and social consequences
- Weak educational attainment contributes to:
  - Wide income disparities.
  - High unemployment.
  - Intergenerational transmission of poverty.
  - Constraints on economic growth.
- The unemployment rate decreases sharply with the level of education, with an especially large premium for having a university degree.

### Policy recommendations and reforms proposed
- Considerable reforms to improve educational outcomes include:
  - (i) Strengthening the training and accountability of teachers, including upgrading some teachers’ skills.
  - (ii) Improving equity and efficiency in the allocation of resources between rural and urban areas.
  - (iii) Closer coordination between tertiary educational institutions and employers to strengthen labor market relevance, including internships and other school-to-work transition avenues, particularly for disadvantaged youth.

*Source: South Africa—Staff Report for the 2017 Article IV Consultation, Information Annex (chapter excerpt).*

### 3.5 percent of GDP.

### 3.5 percent of GDP.

### Risks and inclusivity
- Authorities assess risks to the outlook to be titled towards the downside due to rising global policy uncertainty, persistently low consumer and business confidence and the constraining effects of long-run structural challenges of unemployment and inequality.
- Authorities emphasize the importance of achieving better income distribution through transformation for inclusivity.

### Fiscal Policy and Public Debt Management
- Fiscal stance driven by three considerations: the macro-economic outlook; budget execution; and risks from the financial position of state-owned entities (SOEs).
- Main budget balance was reduced to -3.9 percent in 2016/17.
- Consolidated deficit projected to narrow to 2.6 percent in 2019/20 based on authorities’ growth forecasts.
- Additional fiscal consolidation measures: reduce the spending ceiling by R26 billion and raise additional revenues of R13 billion.
- Authorities state that should growth outcomes disappoint, they would adjust medium-term spending plans while protecting social spending for the most vulnerable.
- Reprioritization within the lower spending ceiling:
  - Cuts to the government wage bill and other current spending.
  - Re-allocation of funds to education, health services, social protection, and municipal functions in rural areas.
- Newly-reformed government procurement system expected to enhance efficiency and transparency.
- Public debt risks:
  - Recent ratings downgrades and the hike in US interest rates pose risks.
  - Low growth cited as the main reason for the rise in gross debt.
  - Active debt-management practices and strategic portfolio risk benchmarks to be continued.
  - Limit for foreign-currency denominated debt set at 15 percent of the total debt portfolio.
  - Domestic markets remain the main source of government borrowing.
  - Short-term risks mitigated by lower inflation and sustained appetite for emerging market securities, largely offsetting ratings downgrades.
- SOE-related fiscal measures:
  - No additional guarantees currently planned for SOEs.
  - Reductions in overall transfers to SOEs reflected in the 2017 Budget.
  - Governance improvements: Cabinet approval of a collaboration framework between SOEs and the private sector, guidelines for remuneration and appointment of board members and corporate executives, and a new shareholder policy.
  - Cabinet expected to consider new efficiency rules for SOEs during the 2017/18 fiscal year.

### Monetary Policy
- SARB Monetary Policy Committee kept the policy rate unchanged at its most recent meeting in May 2017.
- Headline inflation has declined to within the target range of 3-6 percent.
- SARB expects headline inflation to reach levels of around 5.4 percent in the final quarter of 2017, due to a sustained slowdown in food, fuel and electricity price increases.
- Core inflation decelerated partly due to currency resilience during much of 2016, supported by an improved current account and positive global sentiment towards emerging markets.
- Given macro developments, including a widening negative output gap, SARB indicated the end of the tightening cycle that began in 2014 has likely been reached.
- Inflation outlook:
  - Improvement in the outlook described as modest and inflation expectations remain elevated.
  - Longer-term forecast trajectory is uncomfortably close to the upper end of the target range, leaving little headroom for shocks.
  - Risks to the inflation outlook assessed as more or less balanced.
- External position and reserves:
  - Import cover was above 5 months in December 2016 and has slowly improved in the first quarter of 2017.
  - Current account deficit continues to narrow due to an improving trade balance.
  - Non-financial corporations remain well-hedged against foreign currency risks.
  - Fully flexible exchange rate remains a key aspect of the economy’s fundamentals.
  - Authorities will continue to utilize occasional foreign exchange inflows to replenish reserves.

### Financial Sector Policy
- Domestic financial sector described as robust and resilient due to effective supervision, deep and liquid domestic markets, a flexible exchange rate, and low foreign currency exposure.
- Banking sector indicators:
  - Capital adequacy levels of around 15.9 percent.
  - Non-performing loans at 2.9 percent in 2016.
  - Liquidity coverage ratio reached 107.8 percent in December 2016 (minimum requirement 70 percent).
- Credit dynamics:
  - Growth in gross loans around 3 percent in 2016 compared to 11.3 percent at the end of 2015.
  - Lower credit extension viewed as an outcome of more stringent lending rules helping with household deleveraging.
- Regulatory developments:
  - Financial Sector Regulation (FSR) Bill passed by the lower house of Parliament and likely to be enacted soon; assigns primary responsibility for financial stability to the SARB.
  - Financial Intelligence Center Act (FICA) signed into law, fully aligning the country with international standards on AML/CFT.
  - Stress tests institutionalized; thematic on-site inspections and Bank Supervision Department reviews now include AML/CFT checks.
- Financial inclusion and competition:
  - Authorities agree with staff that financial inclusion and increased competition should be major priorities.
  - There are currently 32 banking institutions in the country, excluding mutual and cooperative banks.
  - In 2016, three institutions were granted new banking establishment authorizations.
  - SARB focused on promoting a multi-tiered system to serve SMEs while maintaining a balanced approach to prevent high household indebtedness.

### Structural Reforms
- Policy actions guided by the National Development Plan (NDP) emphasizing inclusive growth through broad-based transformation.
- Reform priorities include:
  - Prioritize education and skills development.
  - Strengthen competition laws.
  - Increase private sector participation in industries dominated by public sector enterprises.
  - Support labor-intensive sectors such as agriculture and tourism.
  - Overcome spatial fragmentation in urban areas.
- Infrastructure and energy:
  - Economic infrastructure accounts for around 77 percent of all government infrastructure spending over the medium-term.
  - Establishment of a new facility to streamline projects through a uniform life-cycle costing and budgeting process for greater efficiency.
  - Commitment to sign off on outstanding power purchase agreements with independent power producers (IPP) in renewable energy and gas.
  - IPP program has helped minimize electricity supply shortages, diversify the energy mix, and increase private sector participation in the electricity sector.
- Procurement and transformation:
  - Revised preferential procurement policy regulations in 2017 intended to channel most of the government’s R500 billion annual procurement towards local producers and previously disadvantaged groups.
  - Budget supports private sector job creation via allocations for tourism, SMEs and cooperatives, agriculture, and scientific and industrial research.
- Labor and wages:
  - Agreement between business, labor, and government on a national minimum wage intended to reduce wage inequality and increase domestic demand when implemented.
  - Measures to mitigate negative employment effects: existence of sector-determined minimum wages, exemptions for small enterprises that cannot afford increases, and prevention of inflation-inducing indexation moves.
  - Authorities recognize the need to prioritize addressing education shortcomings and wage rigidities.

### Conclusion
- Authorities remain committed to macro-economic policies that promote growth, confidence, and financial stability.
- Macro policy stance—inflation targeting, a flexible exchange rate, and deficit reduction—viewed as broadly appropriate for promoting growth and reducing volatility.
- Additional policies to deliver more inclusive growth considered indispensable for long-run growth and can be implemented to promote socio-political stability.
- Authorities look forward to the Fund’s continued contribution to their reform efforts.

*Source: 3.5 percent of GDP.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17189.pdf_