## cr18246 ## Source details **Canonical URL:** [cr18246](https://www.imf.org/-/media/files/publications/cr/2018/cr18246.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18246.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18246.pdf.json) --- ### Recent economic performance - Real GDP growth: 1.3 percent in 2017. - Inflation (CPI, annual average): 5.3 percent in 2017. - Current account deficit: 2.5 percent of GDP in 2017. - Key constraints to growth: - A regulatory environment not conducive to private investment. - Inefficiencies in SOEs increasing the cost of key inputs. - Labor market rigidities. - Insufficient competition in product markets. - Corruption and policy uncertainty. - Social and structural context: - Per-capita growth has turned negative in recent years. - Poverty rate: around 40 percent; unemployment: around 27 percent. - Income Gini coefficient: 0.68 (high inequality). - Education system has failed to equip youth with sufficient human capital. ### Baseline outlook and key projections (current policies) - Growth and inflation: - Staff projects real GDP growth of 1.5 percent in 2018 and 1.8 percent in the medium term. - Inflation projected: 4.9 percent in 2018 and edging higher to 5.5 percent in the outer years. - External sector: - Current account deficit expected to widen to 2.9 percent of GDP in 2018 and to around 3½ percent of GDP over the medium term. - Fiscal and debt dynamics: - FY18/19 budget relies mainly on a 1 percentage point VAT rate increase. - Fiscal consolidation yields a decline in the deficit of about 0.4 percent of GDP in 2018 and another similar decline in the medium term. - Debt would increase to 58–60 percent of GDP in the medium term (Annex V––Public DSA). - Selected baseline numbers (exact table entries preserved): - Real GDP Growth (percent): 2017 = 1.3; 2018 = 1.5; 2019 = 1.7; 2020 = 1.8; 2021 = 1.8; 2022–2023 = 1.8; 2024–2027 = 1.8; 2027–2030 = 1.8 - Current Account Balance (percent of GDP): 2017 = -2.5; 2018 = -2.9; 2019 = -3.3; 2020 = -3.3; 2021 = -3.3; 2022–2023 = -3.4; 2024–2027 = -3.4; 2027–2030 = -3.4 - Gross Government Debt (percent of GDP)2/: 2017 = 53.0; 2018 = 55.0; 2019 = 56.0; 2020 = 57.0; 2021 = 57.6; 2022–2023 = 58.1; 2024–2027 = 58.5; 2027–2030 = 59.0 - Unemployment Rate (percent): 2017 = 27.5; 2018 = 27.9; 2019 = 28.3; 2020 = 28.6; 2021 = 28.7; 2022–2023 = 28.9; 2024–2027 = 29.0; 2027–2030 = 29.4 ### Illustrative reform scenario and macroeconomic impact - Reform package aims to: encourage product market competition; make labor markets more flexible and address skills mismatches; tackle corruption; leverage digitalization. - Staff projected outcomes if full reform package implemented: - Real GDP Growth (percent): 2017 1.3; 2018 1.5; 2019 2.3; 2020 3.0; 2021 3.5; 2022 4.0; 2023 4.0; 2024-2027 4.0; 2027-2030 4.0 - Public debt decline to close to 50 percent of GDP by 2023—up to 10 percentage points of GDP below the baseline. - Inflation would decline to the midpoint of the band (4.5 percent) partly as higher competition counterbalances robust domestic demand. - Private Sector Credit Growth (percent): 2017 4.3; 2018 5.6; 2019 7.3; 2020 9.1; 2021 10.4; 2022 11.5; 2023 12.6; 2024-2027 12.6; 2027-2030 12.6 - Unemployment Rate (percent): 2017 27.5; 2018 27.9; 2019 28.0; 2020 27.6; 2021 26.8; 2022 25.6; 2023 24.4; 2024-2027 21.9; 2027-2030 17.3 - Transition effects: - Current account would initially widen as investment-related imports expand, then narrow as competitiveness and exports improve. - FDI’s contribution to external financing would increase markedly. ### Policy recommendations and sequencing - Governance and anti-corruption: - Deepen fight against corruption and forcefully apply the Public Financial Management Act. - Urgent priority to tackle “state capture” and restore institutional effectiveness. - Fiscal policy: - Contain rise in public debt and build buffers against potential shocks. - Policy options: reduce the high wage bill, improve quality of expenditure, strengthen tax administration. - Some Directors suggested the primary expenditure ceiling could be accompanied by a debt ceiling. - Structural reforms: - Ambitious product and labor market reforms to raise productivity and enhance private sector participation. - Enhance education quality and labor market flexibility; leverage digitalization. - Monetary and financial policy: - Monetary policy should remain cautious; aim to lower inflation expectations toward the midpoint (staff suggests a 4.5 percent point target with an allowance of ±1.5 percent, potentially moving to 4 percent with ±1 percent). - Opportunistically increase international reserves when large inflows occur. - Advance Twin Peaks financial oversight and strengthen stress testing and resolution frameworks. - Sequencing and social compact: - Urgently tackle governance and complete stalled reforms to reduce regulatory uncertainty. - Compensate those negatively affected by reforms; build a social compact to manage short-term costs. ### SOEs, Eskom, and contingent liabilities - Macro-criticality: - Eskom supplies over 90 percent of electricity used in South Africa and exports to the region; Eskom assets estimated at $65 billion (about 16 percent of GDP). - Fiscal exposure and financing needs: - Eskom needs R60–80 billion (1½ percent of GDP) per year for the next five years for capital spending. - Past state support: R23 billion (0.5 percent of GDP) bailout; earlier R60 billion (1.2 percent of GDP) subordinated loan transformed into equity; state guarantees of R350 billion (7 percent of GDP). - Eskom’s debt-to-equity ratio above 70 percent. - Governance-related issues: - Procurement practices influenced by state capture; outsourcing at inflated costs; municipal arrears over $1 billion. - Staff recommendations for SOEs: - Consider strategic equity partnerships and private sector participation given limited fiscal space. - Improve governance: unified legal framework, centralized oversight, competency-based board appointments, accountability. - Reassess business models (example: Eskom generation mix) and run SOEs commercially; compensate public service obligations through budget transfers where appropriate. - Avoid risky contingent liabilities; government guarantees should be contingent on turnaround plans with well-specified performance targets. - Box 4 operational measures: - Expenditure-side: review expensive contracts, reduce overstaffing, discontinue non-core operations. - Revenue-side: review pricing models, sell non-productive assets, collect arrears. ### Monetary policy framework, inflation expectations, and reserves - SARB developments: - Uses Quarterly Projection Model for MPC decisions and public communication. - Policy rate cut: 25 basis points twice—in July 2017 and in March 2018—to 6.5 percent; unchanged in May 2018. - Inflation expectations: - Agents appear to expect inflation at or above the upper end of the 3–6 percent band; SARB publicly stated preference to anchor at 4.5 percent. - Annex IX findings: analysts’ implicit anchors roughly 5–5.5 percent; businesses in 6.5–7 percent; trade unions in 7–8 percent. - Staff recommendations: - Move opportunistically from a band to a point target (first 4.5 percent ±1.5 percent; later 4 percent ±1 percent) if moderation in expectations proves durable. - Maintain caution given upside inflation risks and exchange rate pass-through. - Foreign exchange reserves: - Reserves assessed below adequacy: 64 percent of the unadjusted ARA metric and 70 percent of the ARA metric adjusted for CFMs. - Staff recommends opportunistic reserve accumulation when large inflows occur. ### Financial sector structure, stability, and inclusion - Banking sector metrics (end-2017): - Banking sector assets ≈ 110 percent of GDP. - Five largest banks account for more than 90 percent of assets. - NPL ratio edged higher to 3.2 percent. - Capital adequacy above regulatory requirements; profitability strong but moderated. - System heterogeneity: - Medium and small banks: higher sensitivity to economic activity, target riskier customers, lower asset quality, pockets of vulnerabilities. - Regulatory reforms and safeguards: - Financial Sector Regulation Act (FSR Act) enacted; Twin Peaks model established (Prudential Authority and FSCA). - Recommendation: deposit insurance scheme, upgraded stress-testing framework, annual stress tests, and improved resolution framework for failed small/medium banks. - Financial inclusion: - Deep markets but limited access for poorer households; recommendations include promoting entry of new banks (including full-service digital banks), credit information sharing, credit guarantees, movable assets register, and leveraging digitalization. ### Fiscal risks, debt sustainability, and stress tests (DSA) - Sensitivities and stress scenarios (exact outcomes preserved): - Persistent low growth scenario (growth permanently lower by 1 percentage point on average during 2019–23): debt-to-GDP ratio = 74 percent in 2023. - Primary balance shock (no improvement): debt ≈ almost 60 percent of GDP in 2023. - One-standard-deviation temporary shock to growth in 2019–2020: debt-to-GDP ratio = 62 percent. - Combined macro-fiscal shocks: debt-to-GDP ratio = 67 percent by 2023. - Contingent liability shock (all SOE guarantees and Road Accident Fund exposures called; 84 percent of contingent liabilities materialize): public debt = 75 percent of GDP by 2023. - Probabilities: - Slightly above 10 percent chance debt-to-GDP could exceed 70 percent by 2023 under asymmetric shocks; probability halved under symmetric shocks or faster reform progress. - Policy implications: - Implement structural reforms to raise growth and reduce downside risk. - Pursue fiscal consolidation to stabilize debt while protecting the poor. - Contain SOE contingent liabilities by strengthening governance and oversight. ### External sector vulnerabilities and financing - External debt and financing: - External debt (percent of GDP): 2017 = 49.6; 2018 (baseline projection) = 46.1; 2019 = 47.0; 2020 = 47.5; 2021 = 48.0; 2022 = 48.4; 2023 = 48.8 - Gross external financing needs (GEFNs) projected to average about 18 percent of GDP during 2018–23. - Short-term external debt (remaining maturity) ≈ just above 14 percent of GDP at end-2017; expected to account for about 80 percent of total GEFNs. - Composition of financing: - Current policies: financing reliant on portfolio flows; net FDI flows negative/very low (net FDI outflows 1.7 percent of GDP in 2017); portfolio investment was 4.7 percent of GDP in 2017. - Stress test results: - A 30 percent currency depreciation could push external debt above 60 percent of GDP due to valuation effects. - Combined shocks could raise external debt to about 63 percent of GDP in simulations. - Staff recommendations: - Improve competitiveness, attract durable FDI, and opportunistically accumulate reserves to strengthen FX liquidity buffers. ### Distributional implications and monetary policy effects - Inflation incidence: - Average inflation by expenditure quintile (2009M01–2017M12): Quintile 1: 6.1; Quintile 2: 6.0; Quintile 3: 5.9; Quintile 4: 5.8; Quintile 5: 5.4 - Poorer households face higher inflation and are more likely to encounter the highest monthly inflation. - Food prices account for 35–40 percent of the CPI basket for the lowest quintile. - Distributional effect of unanticipated monetary tightening: - Empirical results suggest tightening that lowers inflation tends to affect the poor proportionately less and can reduce expenditure inequality. - Regression findings: interaction terms indicate a positive differential effect for the poorest decile (e.g., Monetary policy shock * <10th percentile dummy coefficients around 27.14 to 31.21 in reported specifications). - Overall effects are modest and heterogeneous across deciles. ### Bank lending, business confidence, and growth linkages - Innovations in Annex IV: - Inclusion of medium-sized and small banks and explicit assessment of detrended business confidence. - Key econometric findings: - Decline in business confidence since 2011 significantly affected lending by medium-sized banks and to some extent small banks. - One standard deviation increase in confidence (1.9 percentage points) raises output growth by 0.05–0.1 percentage point and real credit by 0.5 percentage point (panel-VAR results). - Historical VAR: pre-2007 lending–growth feedback loops stronger; post-2010 the transmission from domestic demand to credit and from credit back to demand weakened. - Policy implication: - Recovery in confidence and output growth is necessary to rebuild the lending–growth feedback loop; higher capital ratios and lower NPLs would enhance banks’ responsiveness to credit demand. ### Implementation progress and capacity development - FSAP and Twin Peaks implementation: - Financial Sector Regulation Act No. 9 of 2017 signed (21 August 2017) and effective 1 April 2018; established Prudential Authority (PA) and Financial Sector Conduct Authority (FSCA). - Progress on SAM (Insurance Act promulgated 18 January 2018; effect 1 July 2018) and TCF initiatives; draft prudential standards and reforms in train. - Roadmap and staffing moves (e.g., 60 staff moved to PA in October 2017). - Capacity development priorities: - SARB: stress testing, macro/microprudential frameworks, monetary policy framework enhancements, Fintech. - SARS: tax administration and BEPS capacity. - National Treasury: risk management, GFS reporting adoption, public investment efficiency. - STAT SA: property price indices. - CD is demand-driven and focused on peer reviews and analytical support (examples listed in source). *International Monetary Fund staff report — SOUTH AFRICA: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (cr18246).* ### 1.3 percent in 2017. Major obstacles to growth included a regulatory environment not conducive ### SOUTH AFRICA: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION ### Recent economic performance and constraints - Growth and macro outcomes in 2017: - Real GDP growth: 1.3 percent in 2017. - Inflation (CPI, annual average): 5.3 percent in 2017. - Current account deficit: 2.5 percent of GDP in 2017. - Major obstacles to growth: - A regulatory environment not conducive to private investment. - Inefficiencies in SOEs increasing the cost of key inputs. - Labor market rigidities. - Insufficient competition in product markets. - Corruption. - Policy uncertainty. - Structural and social context: - Per-capita growth has turned negative in recent years. - Poverty rate stands at around 40 percent and unemployment has crept up to around 27 percent. - Income Gini coefficient: 0.68 (noted as making South Africa a highly unequal society). - Education system has failed to equip the youth with sufficient human capital. ### Outlook on current policies (baseline scenario) and key projections - Growth and inflation projections: - Staff projects real GDP growth of 1.5 percent in 2018 and 1.8 percent in the outer years. - Inflation is projected to ease to 4.9 percent in 2018 and edge higher to 5.5 percent in the outer years. - External sector: - Current account deficit expected to widen to 2.9 percent of GDP in 2018 and to around 3½ percent of GDP over the medium term. - Baseline characterization: - The baseline scenario is subject to upside developments, but downside risks seem more prominent. - If structural bottlenecks are addressed, growth could be boosted significantly given deep and liquid financial markets, a solid domestic investor base, a floating exchange rate, and limited susceptibility to exchange rate and rollover risk (low foreign currency exposures; long debt maturities and access to segments of the global financial safety net). - Vulnerabilities and external risks: - Significant fiscal risks related to weak and poorly managed state-owned enterprises and other spending pressures. - External risks include large gross external financing needs, and a current account deficit financed by flows prone to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings. - Disruption in trade flows and a fall in commodity prices would worsen the twin deficits and dampen growth. ### Executive Board assessment and policy recommendations - General assessment: - Directors acknowledged important progress after the end of apartheid supported by strong economic institutions, but observed that unemployment and inequality remain high. - They welcomed measures announced by the new administration to improve governance and reignite business and consumer confidence. - Directors encouraged leveraging the recent political transition to advance the reform agenda in a well-sequenced manner. - Governance and anti-corruption: - Urged authorities to deepen the fight against corruption and to forcefully apply the Public Financial Management Act to increase deterrence against corruption. - Recommended completion of measures in telecommunications and mining sectors to attract higher private investment and create employment. - SOEs and fiscal risks: - Noted further progress is needed to contain fiscal risks from state-owned enterprises and to rethink business models, including engaging in strategic equity partnerships with the private sector. - Directors stressed fiscal policy should focus on containing the rise in public debt and building buffers against potential shocks. - Policy options highlighted: reducing the high wage bill, improving the quality of expenditure, strengthening tax administration. - Some Directors noted the primary expenditure ceiling could usefully be accompanied by a debt ceiling. - Labor, education, and competitiveness: - Recommended ambitious reforms in product and labor markets to raise productivity and enhance private sector participation. - Emphasized enhancing education quality and labor market flexibility and leveraging digitalization to boost efficiency and support growth. - Monetary and financial sector: - Commended the South African Reserve Bank’s effective inflation targeting and its intention to lower inflation toward the midpoint of the official target band. - Advised monetary policy should remain cautious, paying attention to fiscal policy and upside inflation risks. - Commended resilience to recent market volatility supported mainly by the floating exchange rate; advised advancing structural reforms to attract more durable foreign investment and opportunistically increasing international reserves. - Welcomed the introduction of the Twin Peaks approach to strengthen financial sector oversight and cross-agency coordination. - Took positive note that the banking system remains sound but stressed continued vigilance due to pockets of vulnerabilities in small and medium-sized banks. - Recommended continuing efforts to enhance financial inclusion, including promoting the entry of new financial institutions and technological solutions, and increasing competition. ### Staff advice and reform priorities - Core staff advice: - Bold structural reforms are urgently needed to reignite strong and inclusive growth. - Recommended reform areas: - Tackling corruption and strengthening governance. - Promoting competition in product markets, including by restructuring weak SOEs. - Advancing labor market reforms and enhancing the quality of education to foster job creation. - Leveraging digitalization. - Policy mix objectives: - Stabilize public debt at levels that provide comfortable buffers. - Anchor inflation expectations closer to the midpoint of the target band. - Maintain the resilience of the financial system. ### Key economic indicators (selected figures from source) - Social and demographic: - Nominal GDP (2016, billions of US dollars): 295 - GDP per capita (2016, in US dollars): 5,311 - Population total (2016, million): 55.6 - Life expectancy at birth (2016, number of years): 62 - Headcount ratio at $1.90 a day (2011 PPP): 16.6 - Undernourishment (2015): 5.0 - Highest 10 percent of population income share: 51.3 - Lowest 20 percent of population income share: 2.5 - Gini coefficient (2010): 63.4 - Selected macro time series (annual percent changes or levels as presented): - Real GDP: 2014: 1.8; 2015: 1.3; 2016: 0.6; 2017: 1.3; 2018 (proj): 1.5; 2019 (proj): 1.7 - Real GDP per Capita: 2014: 0.3; 2015: -0.3; 2016: -1.0; 2017: -0.3; 2018 (proj): -0.1; 2019 (proj): 0.1 - CPI (annual average): 2014: 6.1; 2015: 4.6; 2016: 6.3; 2017: 5.3; 2018 (proj): 4.9; 2019 (proj): 5.3 - Unemployment Rate (percent of labor force, annual average): 2014: 25.1; 2015: 25.4; 2016: 26.7; 2017: 27.5; 2018 (proj): 27.9; 2019 (proj): 28.3 - Gross government debt (percent of GDP): 2014: 47.0; 2015: 49.3; 2016: 51.6; 2017: 53.0; 2018 (proj): 55.0; 2019 (proj): 56.0 - Overall balance (percent of GDP): 2014: 0.4; 2015: -0.3; 2016: 0.9; 2017: 0.5; 2018 (proj): 0.2; 2019 (proj): -0.2 - Current account balance (billions of U.S. dollars): 2014: -17.8; 2015: -14.6; 2016: -8.2; 2017: -8.6; 2018 (proj): -11.0; 2019 (proj): -12.7 - Current account balance (percent of GDP): 2014: -5.1; 2015: -4.6; 2016: -2.8; 2017: -2.5; 2018 (proj): -2.9; 2019 (proj): -3.3 - Gross reserves (billions of U.S. dollars): 2014: 49.1; 2015: 45.8; 2016: 47.4; 2017: 50.7; 2018 (proj): 51.5; 2019 (proj): 50.7 - Total external debt (percent of GDP): 2014: 41.3; 2015: 39.1; 2016: 48.3; 2017: 49.6; 2018 (proj): 46.1; 2019 (proj): 47.0 - Exchange rate (Rand/U.S. dollar, end-period): 2014: 11.6; 2015: 15.6; 2016: 13.7; 2017: 12.3 *Source: IMF staff report — SOUTH AFRICA: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION.* ### 4. The recent political transition offers a ### cr18246 - 4. The recent political transition offers a ### Overview: opportunity and reform priorities - The recent political transition offers a renewed opportunity to advance reforms and exploit the economy’s potential. - Reigniting growth and fostering social inclusion would require addressing governance weaknesses (Annexes I—Governance, II—Eskom), implementing product and labor market reforms, and leveraging opportunities provided by digitalization. - The reforms would unlock private investment and thus support job creation and poverty reduction. - The stated priorities of the new administration are combating “state capture” and promoting jobs and growth. - Poverty (official 2015 data): 55.5 percent below the upper-bound poverty line, 40 percent below the lower-bound poverty line, and 25.2 percent in extreme poverty (below the food poverty line). - Historical note: During 2008–16, TFP growth was negative in the primary, non-manufacturing secondary, and tertiary sectors, and decelerated in higher-technology manufacturing. ### Recent macro-financial developments (key points) - Growth: recovered from 0.6 percent in 2016 to 1.3 percent in 2017; first-quarter 2018 year-on-year expansion of 0.8 percent. - Drivers: higher commodity prices and rebound from a drought; low business confidence impaired manufacturing, wholesale, retail, and transport. - External: current account deficit narrowed in 2017; the external position in 2017 was moderately weaker than implied by fundamentals and medium-term desirable policies (Annex III––External Sector Assessment). - Inflation: headline inflation stayed within the target band (3–6 percent); inflation expectations remained close to the band’s upper end. - Unemployment: increased (Text references unemployment rising; see baseline scenario figures). - Monetary policy: SARB cut the policy rate by 25 basis points twice—in July 2017 and in March 2018—to 6.5 percent; policy rate kept unchanged in May 2018. - Credit and debt dynamics: - Private sector credit growth slowed; household debt declined further as a share of disposable income. - Debt service of private non-financial corporations continued to increase as a share of income. - Twin Peaks regulatory framework introduced to provide a more holistic approach to oversight and bolster financial stability. - Fiscal performance: FY17/18 consolidated fiscal deficit estimated to have exceeded the 2017 budget review target (3.1 percent of GDP) by more than 1 percentage point of GDP. - Asset price volatility: - Major political events and policy decisions drove significant asset price volatility and capital flow swings in 2017–2018. - Examples from Box 1 (selected impacts): - Replacement of the Finance Minister in March 2017 prompted a 10 percent rand depreciation against the U.S. dollar and a 70 basis point rise in 10-year local currency sovereign bond yields in two weeks. - From mid-October to mid-November (following the 2017 MTBPS) the rand weakened about 10 percent and bond yields rose some 90 basis points. - More than 40 percent of local-currency sovereign debt is held by nonresidents. - Between mid-November and end-February (post-elective-conference appointments) the rand appreciated by 20 percent and bond yields declined by 150 basis points. - Authorities signed contracts worth R55 billion (about 1 percent of GDP) with independent power producers in April 2018. - Authorities announced intention to attract $100 billion (about 25 percent of GDP) in FDI over five years. ### Baseline scenario: outlook under current policies - Staff projects growth to rise to 1.5 percent in 2018 and 1.8 percent in the medium term, with private consumption and investment supported by stronger confidence and pent-up demand. - Public investment constrained by reduced budget appropriations and weak activity by financially-constrained SOEs. - Bank lending to households expected to edge moderately higher as households continue to deleverage; lending constrained by low economic activity and banks’ preference for government bonds. - Current account: expected to widen to 3½ percent of GDP as domestic demand recovers. - Inflation: on current policies, average headline inflation would increase to 5.5 percent in line with inflation expectations. - Fiscal policy and debt: - FY18/19 budget relies mainly on a 1 percentage point VAT rate increase on the revenue side. - Expenditure reallocation expands tertiary education subsidies; offset by cuts in goods and services, transfers to public entities, and investment grants to subnational governments. - Fiscal consolidation yields a decline in the deficit of about 0.4 percent of GDP in 2018 and another similar decline in the medium term. - Debt would increase to 58–60 percent of GDP in the medium term (Annex V––Public DSA). - Text Table 1. South Africa: Baseline Scenario on Current Policies (selected series from table) - Real GDP Growth (percent): 2017 = 1.3; 2018 = 1.5; 2019 = 1.7; 2020 = 1.8; 2021 = 1.8; 2022–2023 = 1.8; 2024–2027 = 1.8; 2027–2030 = 1.8 - Real Private Investment Growth (percent): 2017 = 1.2; 2018 = 1.6; 2019 = 2.8; 2020 = 3.2; 2021 = 3.2; 2022–2023 = 3.2; 2024–2027 = 3.2; 2027–2030 = 3.2 - Consumer Price Inflation (percent, period average): 2017 = 5.3; 2018 = 4.9; 2019 = 5.3; 2020 = 5.4; 2021 = 5.5; 2022–2023 = 5.5; 2024–2027 = 5.5; 2027–2030 = 5.5 - Private Sector Credit Growth (percent): 2017 = 4.3; 2018 = 5.6; 2019 = 6.3; 2020 = 6.8; 2021 = 7.1; 2022–2023 = 7.3; 2024–2027 = 7.3; 2027–2030 = 7.3 - Private Sector Credit (percent of GDP): 2017 = 63.4; 2018 = 62.8; 2019 = 62.4; 2020 = 62.1; 2021 = 62.0; 2022–2023 = 61.9; 2024–2027 = 61.8; 2027–2030 = 61.8 - Fiscal Deficit (percent of GDP) 1/: 2017 = -4.6; 2018 = -4.3; 2019 = -4.0; 2020 = -4.0; 2021 = -3.9; 2022–2023 = -3.9; 2024–2027 = -3.8; 2027–2030 = -3.6; (Note: table shows -3.4 in last entry) - Gross Government Debt (percent of GDP) 2/: 2017 = 53.0; 2018 = 55.0; 2019 = 56.0; 2020 = 57.0; 2021 = 57.6; 2022–2023 = 58.1; 2024–2027 = 58.5; 2027–2030 = 59.0; (table extends to 59.2) - Current Account Balance (percent of GDP): 2017 = -2.5; 2018 = -2.9; 2019 = -3.3; 2020 = -3.3; 2021 = -3.3; 2022–2023 = -3.4; 2024–2027 = -3.4; 2027–2030 = -3.4 - Unemployment Rate (percent): 2017 = 27.5; 2018 = 27.9; 2019 = 28.3; 2020 = 28.6; 2021 = 28.7; 2022–2023 = 28.9; 2024–2027 = 29.0; 2027–2030 = 29.4 - Sources: Haver, South African National Treasury, and Fund staff estimates and projections. - Notes: 1/ Consolidated government unless otherwise indicated. 2/ National government. - Policy implication: The subdued medium-term outlook (sub-2 percent GDP growth) is insufficient to generate meaningful per-capita income gains and reduce unemployment and poverty. ### Regional and spillover considerations - South Africa’s subdued growth would have adverse implications for neighbors through SACU transfers, trade, FDI, and remittances. - Financial interlinkages: presence of large South African banks and currency pegs in SACU amplify spillovers. - SACU recipients rely importantly on SACU transfers; inflation rates of SACU countries are synchronized with South Africa’s via currency pegs. ### Risk assessment: buffers and vulnerabilities - Buffers and strengths: - Floating exchange rate absorbs shocks. - Deep financial markets and large pension fund assets provide a solid domestic investor base. - Relatively low foreign currency exposures limit susceptibility to exchange rate risk. - Public sector rollover risk contained by long debt maturities. - Foreign exchange reserves complemented by access to segments of the global financial safety net. - Vulnerabilities: - SOE-related fiscal risks. - Large gross external financing needs; short-term external debt at remaining maturity stood above 14 percent of GDP at end-2017. - Current account deficit financed by flows prone to sudden slowdowns or reversals. - Nonresident holdings of local-currency government bonds are large. - Figures and indicators (qualitative summary from Figures 7 and 8): - Rand volatility is high; South Africa does not stand out in stock of foreign currency debt. - Financial corporates are profitable; banks are strong though soundness indicators moderated after IFRS9. - Sovereign debt largely in rand with long maturities; net IIP positive with important exposures to China. - Gross external financing needs are relatively large; reserves relative to short-term debt are above adequacy but lower compared with other economies. - SOE debt continued to increase. ### Risk scenarios and main downside/upside channels - Upside risk: - Political consensus to address structural bottlenecks could boost growth beyond 2 percent. - Downside risks (prominent): - Domestic risks: - Renewed spending pressures (education subsidies, public sector wages, SOE contingent liabilities) could worsen public finances, trigger additional rating downgrades, and increase financing costs. - Continued policy uncertainty would dampen capital inflows, investment, and growth. - Protracted low growth would weaken the domestic financial system. - External risks: - Tighter global financial conditions or sudden change in global risk appetite could lead to capital outflows, challenging ability to meet large gross external financing requirements (Annex VII––External DSA). - Significant exchange rate depreciation could create inflation risk. - Structural weakness in advanced markets, retreat in cross-border integration, or a fall in commodity prices (minerals and precious metals) would worsen the twin deficits and dampen growth. ### Authorities’ views (summarized) - National Treasury: baseline growth outlook broadly aligned with staff in near term, more optimistic in medium term; projects about 2.5 percent GDP growth in the medium term assuming improved confidence and strengthened SOE governance. - SARB: inflation outlook aligned with staff; current account deficit expected to deteriorate marginally faster due to slightly sharper worsening of terms of trade and the income account. - Authorities broadly agreed with main sources of risk identified by staff; noted resilience from macro fundamentals and institutions and room to accumulate foreign exchange reserves as opportunities arise. - SARB enhancements to financial stability framework and FSCF simulations aim to strengthen analysis of interconnectedness and contingency planning. _International Monetary Fund staff summary based on chapter content._ ### 16. Staff presented an illustrative scenario that incorporates the impact of implementing ### 16. Staff presented an illustrative scenario that incorporates the impact of implementing ### Illustrative reform scenario and policy mix - Staff presented an illustrative scenario that incorporates the impact of implementing a bold and comprehensive package of reforms together with a rebalancing of the policy mix. - Structural reforms should aim at attracting private investment by: - encouraging product market competition, - making labor markets more flexible and addressing skills mismatches, - tackling corruption, and - leveraging digitalization (Figure 9). - A well-calibrated policy mix is needed to supplement the reform agenda over the medium term: - The rapidly shrinking fiscal space leaves little room for policy stimulus. - A somewhat contractionary policy mix beyond what is already planned would be needed over the medium term to build up policy buffers. - The inflation targeting (IT) framework could be enhanced to support the SARB’s stated intention to bring inflation toward the midpoint of the official target band. - Financial sector policy should remain mindful of pockets of vulnerabilities. ### Projected macroeconomic outcomes from full reform implementation (summary) - Staff projects that real GDP growth could rise to 4 percent by 2022 if the full reform package is implemented. - Projected outcomes include: - A meaningful reduction of unemployment and poverty. - Public debt would decline to close to 50 percent of GDP by 2023—up to 10 percentage points of GDP below the baseline. - Bank lending would rise, creating virtuous macro-financial feedback loops and further financial deepening. - Inflation would decline to the midpoint of the band (4.5 percent) partly as higher competition counterbalances robust domestic demand. - The current account deficit would initially widen as investment-related imports expand, before narrowing as higher competitiveness boosts exports. - FDI’s contribution to external financing would increase markedly. ### Text Table 2: Reform Scenario numerical projections (exact values preserved) - Real GDP Growth (percent): 2017 1.3; 2018 1.5; 2019 2.3; 2020 3.0; 2021 3.5; 2022 4.0; 2023 4.0; 2024-2027 4.0; 2027-2030 4.0 - Real Private Investment Growth (percent)1: 2017 1.2; 2018 1.6; 2019 3.4; 2020 5.5; 2021 6.0; 2022 6.7; 2023 6.6; 2024-2027 6.6; 2027-2030 6.6 - Consumer Price Inflation (percent, period average): 2017 5.3; 2018 4.9; 2019 5.3; 2020 5.8; 2021 5.7; 2022 5.1; 2023 4.5; 2024-2027 4.5; 2027-2030 4.5 - Private Sector Credit Growth (percent): 2017 4.3; 2018 5.6; 2019 7.3; 2020 9.1; 2021 10.4; 2022 11.5; 2023 12.6; 2024-2027 12.6; 2027-2030 12.6 - Private Sector Credit (percent of GDP): 2017 63.4; 2018 62.8; 2019 62.6; 2020 62.7; 2021 63.3; 2022 64.5; 2023 66.9; 2024-2027 66.9; 2027-2030 66.9 - Fiscal Deficit (percent of GDP)1/: 2017 -4.6; 2018 -4.3; 2019 -3.7; 2020 -3.4; 2021 -3.2; 2022 -3.2; 2023 -3.2; 2024-2027 -3.1; 2027-2030 -3.1 - Gross Government Debt (percent of GDP)2/: 2017 53.0; 2018 55.0; 2019 55.4; 2020 54.4; 2021 53.0; 2022 51.8; 2023 51.0; 2024-2027 48.4; 2027-2030 45.7 - Current Account Balance (percent of GDP): 2017 -2.5; 2018 -2.9; 2019 -3.6; 2020 -4.3; 2021 -4.9; 2022 -4.4; 2023 -3.9; 2024-2027 -2.2; 2027-2030 -1.5 - Unemployment Rate (percent): 2017 27.5; 2018 27.9; 2019 28.0; 2020 27.6; 2021 26.8; 2022 25.6; 2023 24.4; 2024-2027 21.9; 2027-2030 17.3 Notes attached in source: - 1/ Consolidated government unless otherwise indicated. - 2/ National government. ### Authorities’ perspective - The authorities see space for lifting growth to 4 percent or more should the reforms materialize. - The 2018 Budget Review points to growth driven by reforms in the telecommunication sector, lower barriers to entry more generally, and a boost to confidence from reforms. - Stronger growth would improve tax buoyancy and expand fiscal space, allowing public debt to stabilize. ### Distributional impacts and social policy complementarities - Fiscal policy and redistributive role: - Fiscal policy plays an important role in addressing poverty and inequality in South Africa: cash transfers are larger and tax revenues rely more on progressive direct taxes compared to other EMs. - Fiscal incidence analysis suggests the tax system is mildly progressive while social spending is progressive; targeted transfers are more cost effective in reducing income inequality than in other EMs. - Inflation and inequality: - The SARB has maintained low and stable inflation; inflation was anchored at the upper end of the 3–6 percent target range in the 2010s and has recently fallen to around the midpoint. - Econometric analysis hints to mildly progressive effects of monetary policy effort to keep inflation low—the poorest have benefited the most or been hurt the least in terms of real spending. - Targeted government interventions that complement reforms: - Increasing efficiency of health and education spending, - Facilitating commute to centers of economic activity, - Fiscal policy support for redistributive objectives, - Monetary policy ensuring low and stable inflation. ### Sequencing, costs, and social compact - Adequate sequencing of reforms is important: - Urgently tackle governance and corruption issues and complete stalled reforms to reduce regulatory uncertainty and rebuild trust. - Some product and labor market reforms can be implemented expeditiously, while others requiring parliamentary processes should be initiated as soon as possible. - Reforms will entail costs: - Need to compensate those negatively affected by reforms (incurring fiscal costs) and manage strikes and disruptions. - Governance reforms in procurement and SOE operations could reduce government costs and return illegally procured wealth. - Long-term financing of SOE restructuring could be aided by increased private sector equity participation. - A social compact could help build trust and secure implementation, especially where reforms generate short-term costs for long-term benefits. ### Improving governance and fighting corruption (priority actions) - Governance weaknesses are macro-critical; “state capture” weakened institutions, increased inefficiencies, distorted the playing field, reduced tax revenue, and fostered circumvention of good procurement practices. - The Auditor General estimated irregular and wasteful expenditure at around 1 percent of GDP. - Recent government actions to fight corruption and improve governance include: - Change in SOEs’ boards and management (Eskom, Denel, SAA, others). - Strengthening checks and balances and public procurement by enforcing adherence to existing laws and leveraging digitalization for monitoring and transparency; curtailing non-executive directors’ procurement role to limit political pressure. - Action by the Asset Forfeiture Unit to identify and sanction individuals who captured benefits of an empowerment scheme. - Revamping SARS: suspension of the SARS commissioner and establishment of a commission of inquiry into tax administration. - Prosecution of politicians and advisory firms for fraud, racketeering, and money laundering; freezing of accounts and barring firms from government business. ### Advancing product market reforms (near-term priorities) - Policy uncertainty and regulatory overreach have hindered private investment; services (telecommunications, water, transport, electricity) are more inefficient and costly than peer countries. - Three key near-term product market reforms: - Attract investment to the mining sector by consensually revising the mining charter with all stakeholders to reduce policy uncertainty and spur exports and job creation. - Reduce the cost of broadband by expediting allocation of broadband spectrum through auctions and leveraging private sector capabilities to foster technology adoption and innovation. - Maximize benefits of social grants to the poor by introducing new service providers for grant delivery to reduce intermediation costs and enhancing financial literacy to improve spending decisions. - Other product market reforms to start expeditiously: - Leverage the forthcoming competition bill to rethink the role of SOEs in the economy and improve market structure, price determination, and competitiveness. - Clarify the framework governing proposed land reform to deter uncertainty. ### Addressing SOEs’ challenges and recommended approaches - SOEs have dominant presence and weak finances; governance weaknesses, flawed procurement, and overstaffing are sources of fiscal vulnerability. - Examples: - Eskom struggles with balance sheet and liquidity problems. - Transnet inefficiencies increase freight costs. - Denel suffers governance slippages. - Aviation companies (SAA, SAA Express, Mango) expose national airline industry weaknesses. - Staff advice: - Consider well-defined strategic equity partnerships in key segments and swiftly implement the authorities’ private sector participation framework. - Private sector participation is warranted given limited fiscal space for recapitalization and high consumer costs from inefficiencies; modalities should be carefully assessed with attention to ownership patterns. - Clarify sectoral regulations, optimize costs, review complex ownership oversight models and procurement contracts, and ensure SOEs are commercially run. *Source: IMF staff presentation and analysis as contained in the provided content unit.* ### Box 4. Improving Efficiency and Reducing Fiscal Costs of SOEs ### Box 4. Improving Efficiency and Reducing Fiscal Costs of SOEs ### Key issues and objectives - Authorities aim to improve the governance of SOEs, stabilize their balance sheets, and reassess their strategic orientations. - Market discipline and private participation are identified as tools to increase incentives for greater efficiency, particularly in the airline and transport industries. - Many SOEs face outdated business models (example: Eskom and the competitiveness of coal for electricity generation). ### Strategic recommendations - Consider strategic equity partnership. - Market discipline can increase incentives for greater efficiency. - The airline and transport industries are key candidates. - Countries that have successfully unbundled their electricity utilities and benefited from modern technologies have opted for increased competition and private participation. - Improve SOE governance. - Introduce a unified legal framework for SOEs, consistent with the PFM Act and corporate laws, to improve oversight and accountability. - Centralize the oversight of SOEs. - Ensure board appointments are competency-based and their independence ringfenced from undue political interference. - Improve board accountability through clear and focused legal mandates. - Reassess business models. - Example: In Eskom, emergence of greener and cost-efficient sources makes coal an increasingly uncompetitive option for electricity generation, pointing to the need to reassess the company’s generation mix for longer-term viability. - Run SOEs commercially, and compensate for public service obligations through budget transfers. - For greater transparency and awareness of budget constraints, consider paying for the provision of electricity subsidies to poor households through budget transfers rather than cross-subsidization schemes. ### Fiscal safeguards and contingent liabilities - Avoid risky contingent liabilities. - Any government guarantees of SOE debt, if indispensable, should be contingent on turnaround plans with well-specified implementation performance targets. ### Operational measures to stabilize SOEs - Expenditure-side actions: - Review expensive and improperly allocated contracts without disrupting supply. - Review the size of the workforce and compensation packages. - Rebuild R&D capacity. - Discontinue non-core operations. - Revenue-side actions: - Review pricing models. - Sell non-productive assets. - Collect arrears. *Source: Box 4, "Improving Efficiency and Reducing Fiscal Costs of SOEs," cr18246.* ### 40. The SARB has continued to enhance its successful IT framework (Figure 13). It now uses ### cr18246 - 40. The SARB has continued to enhance its successful IT framework (Figure 13). It now uses ### Monetary policy framework and IT enhancements - The SARB now uses the Quarterly Projection Model as the main tool to inform decisions of the Monetary Policy Committee and publishes the results as part of its communication policy. - In the context of reduced policy and political uncertainty, the frequency of surprise monetary policy decisions has declined. - SARB officials agreed the monetary policy stance should be consistent with the objective of lowering inflation and inflation expectations closer to 4.5 percent over time. - SARB officials noted the balance of risks to the inflation outlook was tilted to the upside and emphasized focusing on the midpoint of 4.5 percent via effective communication. ### Inflation expectations and target recommendations - Economic agents appear to base price setting on a combination of historical inflation and the belief that the SARB targets inflation at or above the upper end of the official target range (Annex VIIII—Inflation Expectations). - The SARB publicly stated its preference to anchor inflation expectations at 4.5 percent. - Staff view: the policy rate cut in March may have been premature given recent fiscal performance. - Staff recommendation: move opportunistically from a band to a point target with allowance to help reduce inflation expectations: - If moderation in inflation expectations proves durable, officially adopt a 4.5 percent point target with an allowance of ±1.5 percent. - To facilitate a further reduction in inflation expectations, the midpoint could be lowered to 4 percent and the allowance to ±1 percent. - Benefits cited: greater convergence of South Africa’s inflation to its trading partners’ declining inflation, reduced risk premiums, and support for growth. - Monetary policy guidance under scenarios: - Under a fiscal correction and bold structural reforms (staff’s reform scenario), the SARB could keep the current monetary policy stance but remain mindful of relatively high inflation expectations and exchange rate pass-through risks from tighter global financing conditions and weaker investor appetite for EM assets. - Under staff’s baseline scenario (absence of fiscal consolidation and meaningful reforms), a tighter monetary policy stance would support reduction in inflation expectations; the pace of tightening should be gradual, paying attention to the negative output gap and the potentially small “sacrifice ratio”. ### Foreign exchange reserves and buffer policy - Foreign exchange reserves are assessed to be below adequacy: - 64 percent of the unadjusted assessing reserve adequacy (ARA) metric. - 70 percent of the ARA metric adjusted for capital flow measures (CFMs). - Staff recommendation: opportunistically buttress the reserve buffer by seizing opportunities for accumulation—such as large foreign exchange inflow transactions. - Staff welcomed that the authorities continue relaxing long-standing CFMs. ### Banking sector structure, vulnerabilities, and regulatory reforms - System-wide metrics (as of end-2017): - Banking sector assets corresponded to around 110 percent of GDP. - More than 90 percent of assets accounted for by the five largest banks. - The non-performing loan (NPL) ratio edged higher to 3.2 percent. - On average, capital adequacy is above regulatory requirements; profitability remains strong though it has declined moderately amid weak economic growth. The liquidity ratio exceeds the regulatory requirement. - System heterogeneity and vulnerabilities: - Medium-sized and small banks are more sensitive to economic activity, target riskier customers, have lower asset quality compared to large banks, and show pockets of vulnerabilities despite larger holdings of equity capital. - Potential contagion via confidence effects could produce macro-financial feedback loops (cited examples: African Bank in 2014; VBS Mutual Bank liquidity shortages in March 2018). - Regulatory and supervisory developments: - The Financial Sector Regulation Act lays the foundation of the Twin Peaks model and confers on the SARB an explicit statutory mandate to enhance and protect financial stability. - Putting in place a deposit insurance scheme will help stem potential contagion from localized events. - Upgrading the stress testing framework and conducting it at least annually recommended to identify vulnerabilities associated with wholesale funding reliance, exposures to SOEs, changes in domestic and global conditions, and pockets in medium-sized and small banks (SIP 3––Buffers and Annex II––Eskom). - Authorities’ views: - Transition to Twin Peaks seen as strengthening the financial stability framework. - Supervision of small and medium-sized banks will continue to receive due attention. - Envisaged resolution framework to allow failed small and medium-sized banks to exit the system, limiting depositors’ losses without negative impact on financial stability. - SARB intends to expand stress tests (produced in cooperation with IMF capacity development) to include insurance companies. - Twin Peaks expected to promote better market conduct and consumer protection; room for greater competition acknowledged. ### Financial inclusion and market access - Findings on inclusion: - South Africa has deep and sophisticated financial markets, but competition and access are limited. - Bank account ownership is skewed to the wealthier population; most poor households’ access is limited to withdrawing cash from social grants accounts, with little usage of other banking services such as savings or loans. - Limited financial inclusion reflects demand and supply constraints—high unemployment and excessive costs of opening and maintaining bank accounts. - Policy and structural measures recommended: - Enhance competition within existing banks, leverage technology, and strengthen financial literacy. - Entry of new banks, including a full service digital one to cater to the “emerging to middle class segment,” will be helpful. - Promote financial inclusion through credit information sharing, credit guarantee schemes, and a movable assets register to improve SME access to credit; such efforts should consider that low-income earners already have high debt levels. - Leverage digitalization as a promising medium to enhance financial inclusion (see ¶32 and ¶33). ### Staff appraisal and cross-cutting policy recommendations - Economic assessment: - Over the past five years, the South African economy has decoupled from the global growth recovery; growth has been negative in per-capita terms, unwinding previous gains in poverty reduction and inequality. - High degree of policy uncertainty from delayed reforms, inconsistent announcements, and governance concerns has led to weak private investment and consumption. - Buffer-building and external resilience: - South Africa should continue bolstering buffers given lackluster growth prospects absent reforms—attract more FDI, opportunistically increase international reserves, and stabilize public debt at a more conservative level. - Stronger buffers would improve the composition of financing of the current account (currently too reliant on portfolio inflows) and strengthen the external position. - Strengths include exchange rate flexibility, low share of foreign-currency denominated public-sector external debt, and a sound financial sector. - Structural reform priorities: - Launch ambitious reforms in labor and product markets, deepen the fight against corruption, and increase private sector participation to boost growth, productivity, and employment. - Improve educational attainment, facilitate competition through entry of new firms and reduced costs in network industries, and leverage digitalization. - Implement quick wins to rebuild trust: consensual adoption of a new mining charter, allocation of broadband spectrum, improve delivery and conduct of social grants for the 30 percent of the population relying on them, and address restrictions for skilled immigrants to mitigate skill shortages. - Reform SOEs: enforce penalties for PFM Act breaches, tighten procurement guidelines, require turnaround plans that optimize costs, make future government guarantees strictly contingent on efficient performance, harmonize legal/regulatory frameworks, and create a central oversight agency. - Fiscal, monetary, and financial sector fine-tuning (staff recommendations): - Fiscal policy: - Focus on building buffers against potential shocks. - Greater current spending based fiscal consolidation over the next few years to address doubled public debt in the last decade and SOE contingent liabilities. - Specifically, reduce the high wage bill and improve the overall quality of expenditure. - Consider a primary expenditure ceiling accompanied by a debt-to-GDP ceiling to ensure debt remains at comfortable levels amid low growth. - Monetary policy: - Remain cautious to safeguard credibility and aim at lowering inflation expectations. - Continue attention to upside inflation risks given stubbornly high inflation expectations. - SARB’s stated intention to bring inflation toward the midpoint of the official target band is welcome. - Authorities could upgrade its inflation targeting framework by moving at an opportune time from a range to an explicit point target with an allowance. - Financial sector policy: - Continue monitoring pockets of vulnerabilities, upgrade stress testing capabilities, and promote entry of new financial institutions and technological solutions to enhance financial inclusion. *Source: IMF staff report (cr18246).* ### 60. Staff recommends that the next Article IV consultation take place on the standard ### 60. Staff recommends that the next Article IV consultation take place on the standard ### Recommendation - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Key national accounts and prices (selected) - Nominal GDP (2017, billions of US dollars) 34940.0 - GDP per capita (2017, in US dollars) 6,1805.0 - Population total (2017, million) 56.551.3 - Real GDP (annual percentage change) - 2013: 2.5 - 2014: 1.8 - 2015: 1.3 - 2016: 0.6 - 2017: 1.3 - 2018 Est.: 1.5 - 2019 Proj.: 1.7 - CPI (annual average) - 2013: 5.8 - 2014: 6.1 - 2015: 4.6 - 2016: 6.3 - 2017: 5.3 - 2018 Est.: 4.9 - 2019 Proj.: 5.3 - GDP deflator (annual percentage change) - 2013: 6.2 - 2014: 5.5 - 2015: 5.1 - 2016: 6.8 - 2017: 5.5 - 2018 Est.: 4.9 - 2019 Proj.: 5.3 - Real GDP per capita (annual percentage change) - 2013: 1.0 - 2014: 0.3 - 2015: -0.3 - 2016: -1.0 - 2017: -0.3 - 2018 Est.: -0.1 - 2019 Proj.: 0.1 ### Savings, investment, and external sector - Gross national saving (percent of GDP) - 2013: 15.4 - 2014: 15.4 - 2015: 16.4 - 2016: 16.6 - 2017: 16.1 - 2018 Est.: 15.6 - 2019 Proj.: 15.4 - Investment (including inventories, percent of GDP) - 2013: 21.2 - 2014: 20.5 - 2015: 21.0 - 2016: 19.4 - 2017: 18.6 - 2018 Est.: 18.5 - 2019 Proj.: 18.7 - Current account balance (billions of U.S. dollars) - 2013: -21.2 - 2014: -17.8 - 2015: -14.6 - 2016: -8.2 - 2017: -8.6 - 2018 Est.: -11.0 - 2019 Proj.: -12.7 - Current account balance (percent of GDP) - 2013: -5.8 - 2014: -5.1 - 2015: -4.6 - 2016: -2.8 - 2017: -2.5 - 2018 Est.: -2.9 - 2019 Proj.: -3.3 - Gross reserves (billions of U.S. dollars, end of period) - 2013: 49.6 - 2014: 49.1 - 2015: 45.8 - 2016: 47.4 - 2017: 50.7 - 2018 Est.: 51.5 - 2019 Proj.: 50.7 - Total external debt (percent of GDP) - 2013: 37.2 - 2014: 41.3 - 2015: 39.1 - 2016: 48.3 - 2017: 49.6 - 2018 Est.: 46.1 - 2019 Proj.: 47.0 ### Fiscal position (consolidated government) - Revenue, including grants (percent of GDP) - 2013: 27.3 - 2014: 27.6 - 2015: 28.1 - 2016: 28.6 - 2017: 28.3 - 2018 Est.: 29.0 - 2019 Proj.: 29.5 - Expenditure and net lending (percent of GDP) - 2013: 31.6 - 2014: 31.9 - 2015: 32.9 - 2016: 32.7 - 2017: 32.9 - 2018 Est.: 33.3 - 2019 Proj.: 33.6 - Overall balance (percent of GDP) - 2013: -4.3 - 2014: -4.3 - 2015: -4.8 - 2016: -4.1 - 2017: -4.6 - 2018 Est.: -4.3 - 2019 Proj.: -4.0 - Primary balance (percent of GDP) - 2013: -1.3 - 2014: -1.2 - 2015: -1.5 - 2016: -0.6 - 2017: -1.0 - 2018 Est.: -0.5 - 2019 Proj.: 0.0 - Structural balance (percent of potential GDP) - 2013: -4.1 - 2014: -4.1 - 2015: -4.1 - 2016: -3.8 - 2017: -3.9 - 2018 Est.: -3.7 - 2019 Proj.: -3.5 - Gross government debt (percent of GDP, central government national government in some tables) - 2013: 44.1 - 2014: 47.0 - 2015: 49.3 - 2016: 51.6 - 2017: 53.0 - 2018 Est.: 55.0 - 2019 Proj.: 56.0 ### Consolidated government operations (selected levels, in billions of rand and percent of GDP) - Total revenue and grants (2012/13–2020/21 shown in table; examples) - 2012/13 Auth.: 893.6; Staff: 992.1 - 2017/18 Auth.: 1,334.6; Staff: 1,482.6 - 2020/21 Proj.: 1,725.5 - Total expenditure (examples) - 2012/13 Auth.: 1,043.4; Staff: 1,143.4 - 2017/18 Auth.: 1,671.2; Staff: 1,678.6 - 2020/21 Proj.: 1,953.3 - Overall balance (in levels, negative = deficit) - 2012/13: -149.8 - 2017/18 Auth./Staff: -188.6 / -202.3 - 2020/21 Proj.: -227.8 - Gross government debt (in levels, billions of rand) - 2012/13: 1,366 - 2013/14: 1,585 - 2014/15: 1,799 - 2015/16: 2,019 - 2016/17: 2,233 - 2017/18: 2,506 - 2020/21 Proj.: 3,309 ### Balance of payments (selected) - Balance on current account (billions of US dollars) - 2013: -21.2 - 2014: -17.8 - 2015: -14.6 - 2016: -8.2 - 2017: -8.6 - 2018 Est.: -11.0 - 2019 Proj.: -12.7 - Exports of goods and services (billions of US dollars) - 2013: 113.6 - 2014: 110.4 - 2015: 95.8 - 2016: 90.8 - 2017: 104.0 - 2018 Est.: 112.5 - 2019 Proj.: 116.3 - Imports of goods and services (billions of US dollars) - 2013: -122.0 - 2014: -115.7 - 2015: -99.9 - 2016: -89.0 - 2017: -99.2 - 2018 Est.: -110.6 - 2019 Proj.: -116.4 - Balance on income (billions of US dollars) - 2013: -9.6 - 2014: -9.4 - 2015: -7.9 - 2016: -8.2 - 2017: -10.5 - 2018 Est.: -10.1 - 2019 Proj.: -10.2 - Overall balance of payments (billions of US dollars) - 2013: 0.5 - 2014: 1.4 - 2015: -1.1 - 2016: 2.7 - 2017: 1.9 - 2018 Est.: 0.8 - 2019 Proj.: -0.8 ### Financial sector and monetary aggregates - Broad money (end-year, billions of rand) - 2013: 2,514 - 2014: 2,697 - 2015: 2,975 - 2016: 3,156 - 2017: 3,359 - 2018 Est.: 3,593 - 2019 Proj.: 3,846 - Credit to the private sector (annual percentage change, selected) - 2013: 7.1 - 2014: 7.2 - 2015: 8.0 - 2016: 4.7 - 2017: 4.3 - 2018 Est.: 5.6 - 2019 Proj.: 6.3 - Monetary base (end-year, billions of rand) - 2013: 191 - 2014: 205 - 2015: 224 - 2016: 240 - 2017: 257 - 2018 Est.: 274 - 2019 Proj.: 293 ### Financial soundness indicators (2012–17, selected) - Risk-weighted capital adequacy ratio - 2012: 15.9 - 2013: 15.6 - 2014: 14.8 - 2015: 14.2 - 2016: 15.9 - 2017: 16.8 - Nonperforming loans to total loans - 2012: 4.0 - 2013: 3.6 - 2014: 3.2 - 2015: 3.1 - 2016: 2.9 - 2017: 2.8 - Return on assets - 2012: 1.5 - 2013: 1.4 - 2014: 1.4 - 2015: 1.5 - 2016: 1.7 - 2017: 1.7 - Household debt to GDP - 2012: 47.7 - 2013: 46.3 - 2014: 45.8 - 2015: 46.2 - 2016: 43.5 - 2017: 42.9 ### Medium-term macroeconomic framework (2013–23, selected projections) - Real GDP (annual percentage change) projected 2020–23: 1.8, 1.8, 1.8, 1.8 (2019–2023 row shows steady 1.8) - CPI (annual average) projected 2019–23: 5.3, 5.4, 5.5, 5.5, 5.5 (table entries across 2018–23) - Gross government debt (percent of GDP) projected - 2018: 55.0 - 2019: 56.0 - 2020: 57.0 - 2021: 57.6 - 2022: 58.1 - 2023: 58.5 - Current account balance (percent of GDP) projected 2019–23: -3.3, -3.3, -3.3, -3.4, -3.4 ### Indicators of external vulnerability (selected) - Gross international reserves (billions of U.S. dollars) - 2013: 50.7 - 2014: 49.6 - 2015: 49.1 - 2016: 45.8 - 2017: 47.4 - Reserves in months of prospective imports of goods and services - 2013: 5.0 - 2014: 5.1 - 2015: 5.9 - 2016: 6.2 - 2017: 5.7 - Total external debt (percent of GDP) - 2012: 35.8 - 2013: 37.2 - 2014: 41.3 - 2015: 39.1 - 2016: 48.3 - 2017: 49.6 - Exchange rate (Rand/U.S. dollar, period average) - 2012: 8.2 - 2013: 9.7 - 2014: 10.8 - 2015: 12.8 - 2016: 14.7 - 2017: 13.3 _ Sources: South African Reserve Bank, National Treasury, Haver, Bloomberg, World Bank, and Fund staff estimates and projections. _ ### Annex I. Governance, Corruption, and Economic Performance ### Annex I. Governance, Corruption, and Economic Performance ### Rising Corruption, Deteriorating Governance - The perception of corruption in South Africa has deteriorated markedly in the last two decades; the Worldwide Governance Indicators control of corruption shows a clear deteriorating trend. - The deterioration in control of corruption is associated with declines in government effectiveness, regulatory quality, and the rule of law. - South Africa’s corruption-related scores are somewhat better than the BRICS average but lag significantly compared to the OECD average. - The “State of Capture” (public protector, 2016) documents: - Established policies and executive nominations being influenced by private individuals with access to power. - Contracts in SOEs tailored to benefit specific companies and individuals, in some instances violating the PFM Act. - Removal of perceived inflexible ministers, public officials, and SOE Board members and replacement with more malleable appointees. - Hollowing out of government institutions, particularly at the National Treasury and SARS. - Elevated levels of policy uncertainty arising from policies adopted under state capture. ### Adverse Economic Impact of Weak Governance and Corruption - Private investment and business environment: - Corruption is consistently ranked as one of the top five deterring factors for investment. - Other linked factors: red tape, inefficient bureaucracy, and policy instability. - The slowdown in private investment contributed to an overall slowdown in economic growth. - Tax administration and revenue: - SARS capacity constraints reduced its ability to collect taxes; consequences include poor compliance by high net worth individuals and multinationals. - Declining tax morale linked to weakened public service delivery has affected compliance. - Corporate income tax and non-tax revenue have declined markedly (disaggregation noted in source). - Public procurement: - Weak enforcement and widespread exceptions to competitive bidding have led to irregularities and perceptions of unfairness. - Small tenders with contracts accounting for nearly 2 percent of GDP have not been subject to open bids. - Diversion of government program funds by service providers has reduced program efficiency and efficacy. - SOE financial performance: - SOEs such as Eskom, Denel, and SAA show marked deterioration in financial performance. - Cost overruns and tailored contracts are attributed to weak governance. - SOEs weigh on the fiscus via contingent liabilities and low returns. ### Significant Gains from Improving Governance and Reducing Corruption - Human development: - Lower levels of corruption perception are associated with higher levels of human development (per Figure A1.4 in source). - Growth implications: - Empirical estimates (system GMM, controlling for other determinants and an SSA dummy) indicate that a 10-point improvement in corruption perceptions in the average SSA country is associated with an increase in GDP per capita growth of about 1 percentage point. - South Africa’s corruption perception index is 43 versus a global average of 44.3. - Improving South Africa’s score by 10 points (2 points higher than its 2007 score) could be associated with a 1 percentage point increase in growth. - Policy implication: - Delivering on the fight against corruption and strengthening governance could yield significant gains in growth, employment creation, and social inclusion. ### Macro-Criticality and Fiscal Risks from Eskom (Annex II summary points relevant to governance) - Macro-critical role: - Eskom supplies over 90 percent of electricity used in South Africa and exports to the region. - Eskom assets are estimated at $65 billion, or about 16 percent of GDP. - Revenue and demand pressures: - Lower-than-projected demand due to weaker economic growth and grid defection by large firms; independent power producers have joined the grid. - Electricity sales in FY17/18 expected to be lower relative to projections. - Tariffs and regulatory interactions: - Eskom’s MYPD3 assumed price increases averaging 8 percent a year over FY13–18; actual adjustments have been more in line with inflation. - In FY17/18 Eskom applied for a tariff adjustment of 19.9 percent, but was granted only 5.2 percent. - Continued alignment of tariff adjustments with inflation could create additional shortfalls for Eskom relative to expectations. - Municipal arrears: - Eskom’s arrears from municipalities have continued to accumulate and now stand at over $1 billion. - Governance-related cost pressures: - Procurement practices influenced by state capture led to renegotiations favoring a new provider that delivered inferior quality coal at higher price and to conflicts of interest with segments of Eskom staff engaged in procurement and service delivery. - Outsourcing of key services at inflated costs and procurement/tender tailoring resulted in cost overruns for investment projects. - Balance sheet, financing, and fiscal exposure: - Despite interventions (R23 billion (0.5 percent of GDP) state bailout; transformation of an earlier R60 billion (1.2 percent of GDP) subordinated loan into equity in 2015; state guarantees of R350 billion (7 percent of GDP)), Eskom increased reliance on development finance institutions. - Eskom’s debt to equity ratio is above 70 percent. - Eskom needs R60–80 billion (1½ percent of GDP) per year for the next five years to cover its capital spending. - Eskom’s liquidity is under pressure; spread on international bonds about 490 basis points relative to the benchmark as of end-June (source). - Crisis mitigation and restructuring: - Deteriorating governance and solvency concerns brought Eskom close to default in early 2018; appointment of a new board and management restored market access. - Measures recommended to contain Eskom’s balance-sheet deterioration include: - Revisiting expensive contracts. - Reducing overstaffing. - Disposing of unproductive and non-core assets to raise revenue. - Unbundling generation, transmission, and distribution segments. - Allowing strategic equity partnership with the private sector. - Running Eskom on a commercial basis to improve quality and reduce inefficiencies. - Strategic reorientation is needed as coal generation becomes increasingly costly relative to cleaner sources, exposing Eskom to stranded asset risk. ### External Sector and External Balance Highlights (select figures) - Net international investment position (NIIP) and external debt: - NIIP stood at 12 percent of GDP as of end-2017 (after improvement to 16 percent of GDP in 2015 and subsequent movement). - Gross external debt rose to 49.6 percent of GDP at end-2017 from 26 percent of GDP at end-2008. - Short-term external debt (residual maturity) amounted to 14.2 percent of GDP at end-2017. - Current account (CA): - CA deficit narrowed to 2.5 percent of GDP in 2017 from 2.8 percent in 2016. - CA deficit projected to widen to around 3 percent of GDP in 2018 as the trade surplus moderates. - EBA CA regression estimates: - EBA CA Norm 0.7 percent of GDP. - Staff-adjusted CA norm (after demographic and other adjustments) = -0.4 percent of GDP. - Cyclically-adjusted CA (revised) = -1.7 percent of GDP. - Staff CA gap = -1.3 percent of GDP. - The CA gap largely explained by structural factors not captured by the model. - Real effective exchange rate (REER): - CPI-REER appreciated by 12.4 percent on average in 2017 relative to 2016. - As of May 2018, the REER had appreciated an additional 5.6 percent relative to the 2017 average. - Staff assesses REER overvaluation of 0–10 percent for 2017, broadly consistent with CA gap estimates. - Capital and financial flows: - Net FDI flows at -1.7 percent of GDP in 2017 (fourth consecutive year of net FDI outflows). - Portfolio investment was 4.7 percent of GDP in 2017 and was the main source of CA financing. - Gross external financing needs stood at 14 percent of GDP in 2017. - High reliance on non-FDI flows and high nonresident holdings of local financial assets pose risks; mitigating factors include a floating exchange rate, large rand-denominated share of external debt (about half), and a sizable domestic institutional investor base. - Reserves and FX: - International reserves equivalent to 14.5 percent of GDP at end-2017, down from 16 percent the year before. - Reserves cover 5½ months of projected imports. - Reserves are below the IMF’s composite adequacy metric (64 percent of the metric without considering existing capital flow management measures, and 70 percent of the metric after considering them). - Staff recommends reserve accumulation as conditions allow, subject to maintaining the primacy of the inflation objective. - Policy recommendations to reduce external position gap and strengthen resilience: - Improve competitiveness and increase employment and savings. - Foster entry into key product markets (power generation, transportation, telecommunications). - Upgrade infrastructure and education/skills within the fiscal envelope. - Promote greater financial inclusion. - Preserve government debt sustainability. - Accelerate labor and product market reforms to attract durable foreign inflows such as FDI. - Seize opportunities (e.g., large FDI transactions) to accumulate reserves and strengthen FX liquidity buffers. *Prepared by IMF staff as presented in Annex I and relevant cross-referenced annexes of the source PDF.* ### Annex IV. Bank Lending and Economic Growth ### Annex IV. Bank Lending and Economic Growth ### Innovations and methodology - Two main innovations introduced: - Inclusion of medium-sized and small banks in the analysis (data from South African Reserve Bank (SARB)), recognizing that preceding studies focused on the largest 4–5 banks representing more than 90 percent of system assets. Medium-sized and small banks tend to have higher equity capital and non-performing loans, and different funding profiles compared to large banks. - Explicit assessment of the impact of business confidence (detrended) on bank lending; confidence has declined since 2011 to very low levels and may have depressed private investment and demand for bank credit. - Model features (Box A4.1): - Bank-level monthly data for 2009M1–2017M11 and macro-level data. - Explanatory variables interacted with bank-size dummies (large = top 5, medium = next 7, small = rest). - Key variables: detrended business confidence, real GDP growth (12-month ahead constant horizon forecasts from Consensus Economics), NPLs and total capital ratios (more than 30 banks), VIX (detrended). - Bank-level variables lagged by one period; macro variables used contemporaneously. ### Key econometric findings (bank-level pooled and bank-dummy models) - Heterogeneous impact of confidence and balance sheet variables across bank sizes: - The decline in business confidence since 2011 has had a particularly important effect on bank lending by medium-sized banks, and to some extent on small banks. - Lending by large banks has been more dependent on economic activity (GDP growth). - Bank balance sheet conditions affect lending differently: large and small banks rely more on asset quality (NPLs), while medium-sized banks’ lending is more dependent on capital. - Table A4.1 highlights (model estimates for 2009M01–2017M11): - Lagged real credit growth (L1) coefficients are consistently high (examples: 0.841***, 0.840***, 0.840*** across models). - Confidence shows positive and statistically significant coefficients in many specifications (e.g., 0.203***, 0.214***, 0.199** in pooled models). - Interaction terms indicate stronger confidence coefficients for medium banks (e.g., 0.329**, 0.318**, 0.365**, 0.354**). ### Panel-VAR monthly analysis (2009M1–2017M11) — spillovers and magnitudes - Stronger confidence: - One standard deviation increase in confidence (1.9 percentage points) raises output growth by 0.05–0.1 percentage point and real credit by 0.5 percentage point. - Output to deposits: - An increase in output growth by one standard deviation (0.1 percentage points) lifts growth of deposits by 0.6 percentage point. - Deposits–credit feedback: - When deposit growth increases by one standard deviation (8.6 percentage points), credit growth is boosted by 1.5 percentage points. - Limited balance-sheet spillback: - Higher growth of deposits or credit (by one standard deviation) boosts output growth by an economically insignificant amount (about one-tenth of its one standard deviation movement). ### Historical VAR comparison (quarterly macro model, 1991Q1–2017Q4) - Two sub-periods estimated: 1991Q1–07Q4 and 2010Q1–17Q4 (VAR with 4 lags; confidence cycle around HP trend; domestic demand and bank lending real year-on-year growth). - First sub-period (1991Q1–07Q4): - Stronger confidence boosts domestic demand; domestic demand increases bank credit; higher bank credit spills back to boost domestic demand — creating a positive feedback loop. - Second sub-period (2010Q1–17Q4): - Stronger confidence boosts domestic demand, but the transmission from domestic demand to bank credit and the spillback from bank credit to domestic demand are statistically weak or absent. - Interpretation: The lending-to-growth feedback loop was stronger through 2007 and has weakened in the more recent period of low confidence and low growth. ### Policy implications and outlook - Current state: - Weak confidence and growth have weakened the nexus between bank lending and economic growth; banks’ balance sheet deterioration has been driven by macroeconomic factors. - Outlook: - As confidence recovers and output growth picks up, aggregate demand is expected to become more responsive to bank lending, allowing banks to support growth recovery. - Higher capital ratios and lower NPLs would further facilitate banks’ responsiveness to credit demand and help recreate virtuous macro-financial feedback loops. *Prepared by Ken Miyajima (Annex author) — IMF staff analysis based on bank-level and macro-level econometric models described in the source document.* ### 6. The DSA suggests South Africa’s government debt is highly sensitive to an individual ### 6. The DSA suggests South Africa’s government debt is highly sensitive to an individual ### Stress-test scenarios and projected debt outcomes - Persistent low growth scenario: - Growth permanently lower than the baseline by 1 percentage point on average during 2019–23. - Result: debt-to-GDP ratio of 74 percent of GDP in 2023. - Scenario factors: adverse impact of lower tax revenue elasticities, higher interest rates, and denominator effects of lower GDP. - Primary balance shock scenario: - If the primary balance failed to improve during the rest of the projection period: projected debt level would increase to almost 60 percent of GDP in 2023. - If a one-standard-deviation temporary shock to growth materializes in 2019 and 2020: debt-to-GDP ratio would reach 62 percent. - Combined macro-fiscal shocks scenario: - Combination of standard shocks to growth and interest rates, a primary balance shock (a temporary half of a 10-year historical standard deviation deterioration), and an exchange rate shock (consistent with the maximum movement over the past 10 years and an exchange rate pass-through of 0.25). - Result: debt-to-GDP ratio increases to 67 percent by 2023. - Gross financing needs: marginally below the 15 percent high-risk threshold during most of the projection period. - Contingent liability shock scenario: - If all SOE loan guarantees and the contingent liabilities of the Road Accident Fund were called: public debt would rise to 75 percent of GDP by 2023. - This scenario implies the materialization of 84 percent of contingent liabilities. - Significance: underscores growing risks posed by contingent liabilities—direct fiscal impact and indirect effects on investor confidence, borrowing costs, and growth. ### Heat map, market indicators, and vulnerability drivers - Heat map summary: - Highlights sensitivity to growth and contingent liability shocks. - Indicative thresholds used: 70 percent of GDP for debt and 15 percent of GDP for gross financing needs. - Market and balance-sheet indicators noted: - High bond spreads: slightly below 600 bps. - Gross financing needs high-risk benchmark: 15 percent of GDP. - Other risk-enhancing features: significant external financing requirements and relatively high share of debt held by non-residents. - Mitigating factors: - Large domestic institutional investor base. - Low share of foreign currency and short-term debt. - Additional numerical references in the assessment context: - Benchmarks cited in the framework: 70 percent of GDP (debt), 15 percent of GDP (gross financing needs). - Bond spread reference range: 200 and 600 basis points. ### Probability, distributional results, and role of reforms - Fan-chart (predictive density) insights: - Under predominance of asymmetric shocks: slightly above 10 percent chance that debt-to-GDP could exceed 70 percent of GDP by 2023. - Under predominance of symmetric shocks (e.g., faster progress on structural reforms): probability of debt exceeding 70 percent of GDP is halved. - Interpretation: - Structural reforms reduce the probability of debt distress by shifting the distribution toward more favorable outcomes. ### Policy implications and recommended responses (as reflected in the assessment) - Fiscal and structural priorities implied by the scenarios: - Implement structural reforms to raise growth and lower downside risk. - Pursue fiscal consolidation to stabilize debt over the medium term, while protecting the poor. - Address contingent liability risks (SOE governance, oversight of Road Accident Fund exposures). - Market and financial sector actions: - Strengthen governance in SOEs to reduce contingent liabilities. - Monitor and manage external financing requirements to mitigate exposure to bond-spread shocks and capital flow reversals. - Maintain the large domestic investor base and preserve the low share of foreign-currency and short-term debt as buffers. *Source: IMF staff.* ### Annex VII. External Debt Sustainability Analysis ### Annex VII. External Debt Sustainability Analysis ### Summary assessment - The external DSA framework suggests that South Africa’s external debt will remain sustainable over the medium term, but is vulnerable to shocks. - Gross external financing needs are large and external financing is reliant on portfolio flows subject to risk of reversals. - A deceleration in economic activity or higher interest rates may lead to moderate increases in external debt, which is already at relatively elevated levels. - A currency depreciation could have a significantly larger impact, albeit mitigated by the large share of local currency-denominated external debt. ### External debt dynamics (recent developments) - External debt increased in 2017 amid a pickup in government financing needs. - As of end-2017, South Africa’s external debt, valued in U.S. dollars, stood at just below 50 percent of GDP, up from about 48 percent of GDP a year earlier. - Foreign currency-denominated debt moderated as a share of GDP, while local currency-denominated debt (when expressed in U.S. dollars) increased partly as general government external debt picked up moderately. - Total external debt rose somewhat during 2017 following a faster trend increase during 2012–16, primarily associated with an increase in long-term general government external debt. ### Gross external financing needs (GEFNs) and financing composition - GEFNs are projected to average about 18 percent of GDP during 2018–23, broadly unchanged from recent years. - Short-term external debt (remaining maturity) stood at just above 14 percent of GDP at end-2017. - Short-term external debt (remaining maturity) is expected to continue to account for about 80 percent of total GEFNs over the medium term. - On current policies, financing of the current account deficit is projected to continue to come from non-FDI inflows: - Portfolio investment inflows were 5.5 and 4.7 percent of GDP in 2016 and 2017, respectively. - FDI net outflows intensified to 1.7 percent of GDP in 2017. - Net FDI flows are anticipated to remain negative or very low during the projection period; net portfolio investment is expected to continue to provide the bulk of financing, supported by other investment inflows (primarily bank loans). ### Vulnerabilities and stress test results - Sizable GEFNs would keep South Africa’s external vulnerabilities elevated. - External debt is projected to remain slightly below 50 percent of GDP over the forecast horizon. - The debt-stabilizing non-interest current account deficit is estimated at 2 percent of GDP. - Stress tests indicate: - A 30 percent currency depreciation could push external debt above 60 percent of GDP due to price and valuation changes. - Other shocks simulated—widening of the non-interest current account deficit, deceleration in real GDP growth, and a rise in the interest rate—would lead to moderate increases in external debt. - The high share of rand-denominated external debt (more than half of external debt is denominated in rand) mitigates some of the exchange-rate shock impact. ### Key figures from Table A7.1 (selected items, percent of GDP unless otherwise indicated) - External debt (percent of GDP): - 2013: 37.2 - 2014: 41.3 - 2015: 39.1 - 2016: 48.3 - 2017: 49.6 - 2018 (baseline projection): 46.1 - 2019: 47.0 - 2020: 47.5 - 2021: 48.0 - 2022: 48.4 - 2023: 48.8 - Change in external debt (line 2): - 2013: 1.4 - 2014: 4.1 - 2015: -2.3 - 2016: 9.2 - 2017: 1.3 - 2018: -3.5 - 2019: 0.9 - 2020: 0.5 - 2021: 0.5 - 2022: 0.4 - 2023: 0.4 - Gross external financing need (in billions of US dollars), selected years: - 2013: 66.4 - 2014: 57.2 - 2015: 63.4 - 2016: 51.1 - 2017: 48.6 - 2018: 60.7 - 2019: 67.0 - 2020: 79.5 - 2021: 77.8 - 2022: 80.7 - 2023: 83.7 - Gross external financing need (in percent of GDP): - 2013: 18.1 - 2014: 16.3 - 2015: 20.0 - 2016: 17.3 - 2017: 13.9 - 2018: 16.2 - 2019: 17.3 - 2020: 19.7 - 2021: 18.5 - 2022: 18.4 - 2023: 18.4 - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): 2018: 1.5; 2019: 1.7; 2020: 1.8; 2021: 1.8; 2022: 1.8; 2023: 1.8 - Nominal external interest rate (in percent): 2018: 3.0; 2019: 2.9; 2020: 2.9; 2021: 2.9; 2022: 3.0; 2023: 3.0 - Current account balance, excluding interest payments (percent of GDP): 2018: -1.5; 2019: -2.0; 2020: -2.0; 2021: -2.0; 2022: -2.0; 2023: -2.1 ### Scenarios and bound tests (summary) - Individual permanent one-half standard deviation shocks were simulated for: - Interest rate shock - Growth shock - Current account shock - A one-time real depreciation of 30 percent is simulated (occurs in 2019 in the analysis). - A combined shock scenario raises external debt to about 63 percent of GDP in the simulation presented. --- ### Annex VIII. The Distributional Impact of Inflation ### Objective and approach - The note explores the distributional impact of inflation and develops an indicator of unanticipated monetary policy shocks to mitigate econometric problems. - It provides evidence that low and stable inflation as a result of monetary policy tightening tends to affect the poor proportionately less than the better-off and could reduce expenditure inequality in South Africa. - An unanticipated monetary policy shock exerts a modest and less unfavorable effect, or even a favorable effect, on the expenditure of poorer individuals. ### Key empirical observations on inflation incidence - Using CPI disaggregation by expenditure quintiles (2009M01–2017M12): - Average inflation by expenditure quintile: - Quintile 1: 6.1 - Quintile 2: 6.0 - Quintile 3: 5.9 - Quintile 4: 5.8 - Quintile 5: 5.4 - Probability of facing highest inflation in a given month: - Quintile 1: 56 - Quintile 2: 7 - Quintile 3: 4 - Quintile 4: 6 - Quintile 5: 22 - Average inflation, conditional on that quintile facing the highest inflation: - Quintile 1: 7.0 - Quintile 2: 8.3 - Quintile 3: 6.7 - Quintile 4: 5.4 - Quintile 5: 5.1 - Poorer households face higher inflation in general and are more likely to encounter the highest inflation in any given month. - Food prices account for 35–40 percent of the CPI basket for the lowest expenditure quintile, almost four times the share for the highest expenditure quintile. - Nearly one third of the population live on grants, a stream of nominal income affected by monetary policy to a limited extent. ### Household asset and debt patterns (NIDS Wave 4, nominal Rand) - Net total assets and financial positions by decile (selected entries): - Decile 1: Net total assets: 900; Financial assets: -; Financial debt: 300 - Decile 5: Net total assets: 15,633; Financial assets: 250; Financial debt: 3,000 - Decile 9: Net total assets: 355,966; Financial assets: 6,000; Financial debt: 32,000 - Net financial assets appear negative across deciles; poorer individuals’ exposure to changes in debt service depends on borrowing from lenders whose rates may be less responsive to small central bank rate changes. ### Data and poverty context - The study uses the National Income Dynamics Study (NIDS) tracking the same individuals across 4 waves (2008, 2010–11, 2012, and 2014–15). - Annualized monthly expenditure across waves (Rand, decile medians shown): - Wave 1 (2008) decile 1: 1,884; decile 10: 101,884 - Wave 4 (2014–15) decile 1: 3,560; decile 10: 64,689 - Poverty lines (monthly x 12, Rand) across waves: - Food line (Wave 4): 5,148 - Lower bound (Wave 4): 7,560 - Upper bound (Wave 4): 11,604 - Memorandum items (per capita, Wave 4): - GDP per capita: 72,870 - Disposable income per capita: 42,959 ### Identification of unanticipated monetary policy shocks - Following Furceri et al. (2017), the forecast error (FE) of the policy rate, GDP growth, and inflation is calculated as end-year actual values less forecasts in October. - The residuals from the regression of the policy rate FE on the growth FE and the inflation FE represent the unanticipated monetary policy shock. - A rise in the unanticipated monetary policy shock (indicating tightening) reduces inflation but has a muted impact on growth. - The unanticipated monetary policy shock estimated for South Africa is similar to those estimated for the US in comparable studies, consistent with similar central bank reaction functions. ### Econometric findings on distributional impacts - Real expenditure growth is regressed on the unanticipated monetary policy shock, controlling for individual characteristics (age, education attainment, gender, race, employment status) and economic activity. - The monetary policy shock is interacted with expenditure decile dummies to identify heterogeneous responses. - Estimated results (summary): - Real expenditure growth of the lowest expenditure decile tends to increase following monetary policy tightening—likely because lower inflation benefits those relying mainly on government transfers. - Moving up the expenditure distribution, the impact turns negative, but magnitudes remain relatively small for the middle deciles. - For the upper half of the surveyed population, the negative impact increases steadily with expenditure level; the highest expenditure decile is affected by several times more than some lower deciles. - Expenditure growth is stronger when economic growth is higher, and for employed and younger individuals. - Regression table highlights (coefficients scaled by average size of exogenous monetary policy shock during 2010–16; significance levels retained in source): - Monetary policy shock main effect (various models): coefficients around -5.76 to -22.89 with significance (*** where indicated). - Monetary policy shock * <10th percentile dummy: coefficients around 27.14 to 31.21 (*** where indicated), indicating a positive differential effect for the poorest group. - Real GDP growth positive and significant (e.g., 5.99*** in one specification). - Employment status positive and significant (e.g., 9.66*** in one specification). - Regression sample size: N = 18,805 (across models as reported). - Dependent variable winsorized at (10, 90). ### Interpretation - The evidence suggests that lower inflation resulting from monetary policy tightening can reduce expenditure inequality because: - Poorer individuals suffer disproportionately from high inflation and rely on government transfers, so they benefit more from inflation reduction. - Wealthier individuals are affected mainly through lower asset price appreciation and higher debt service costs. - The overall distributional effect of unanticipated monetary policy tightening is modest and heterogenous across expenditure groups. *Source: IMF staff.* ### Annex IX. How Robustly are Inflation Expectations Anchored? ### Annex IX. How Robustly are Inflation Expectations Anchored? ### Summary - Estimates an “implicit inflation anchor” using actual and projected inflation to capture the long-run inflation anchor as perceived by economic agents. - Using agent-level data for South Africa (2001–17, quarterly), results indicate inflation expectations have become more forward-looking and the degree to which the implicit inflation anchor pins down expectations at longer horizons has generally increased. - Levels of implicit anchors for businesses and trade unions have remained above the upper end of the official inflation target range of 3–6 percent and tended to drift away. - Structural rigidities may explain some of the behavior; consideration could be given to upgrading the inflation targeting framework to better anchor expectations. ### Inflation Developments - Historical context: - Interest rates became pivotal after direct monetary controls were replaced with market-based monetary policy in 1980. - Inflation fluctuated in the range of 10–20 percent during the 1980s and early-1990s. - Inflation registered single-digit outturns from end-1992 and averaged slightly below 8 percent in 1993–99. - Inflation targeting timeline: - Intention to adopt inflation targeting announced in August 1999. - Planned narrowing of the target range from 3–6 percent to 3–5 percent in 2004–05 was postponed following a spike in inflation after the rand weakened in late 2001. - Inflation surged in 2008 on higher commodity prices, then fell to the lower end of the target range; since late-2011 inflation remained around the upper end of the 3–6 percent target range. - Q1 2018 data show a marked decline in inflation expectations (note: results reported do not incorporate Q1 2018). - Comparative performance: - Average inflation in emerging economies to which South Africa exports fell from 7 percent in 2000–02 to around 5 percent in 2017. - Inflation in advanced economies remained steady at around 2 percent. - Inflation in South Africa remained at around 6 percent over the same period. - South Africa lagged the global disinflation trend, with inflation rising to somewhat above the 50 percent range around the median and to near the highest 20 percent globally. ### Developments in Inflation Expectations - Heterogeneity across agents: - Analysts’ expectations are relatively well anchored within the official 3–6 percent target band. - Businesses’ and trade unions’ expectations are more volatile and generally slightly above the upper end of the target band. - Expectations of businesses and trade unions are highly correlated; firms form expectations based on wage setters’ signals. - Horizon differences: - Two calendar years ahead inflation expectations are better anchored than one calendar year ahead expectations. - Recent movements: - Inflation expectations fell markedly recently, likely reflecting favorable inflation outturns and anticipation of faster structural reform implementation by the new administration. ### Model and Data - Methodology: - The “implicit inflation anchor” is estimated using decay functions, motivated by the idea that long-horizon forecasts may be anchored at a constant level (which may differ from the stated target) or be influenced by actual inflation at the time of the forecast. - As the forecasting horizon shortens, the influence of the implicit anchor is expected to decrease. - Data: - Applied to survey-based inflation expectations collected by the Bureau of Economic Research of South Africa (BER) for analysts, businesses, and trade unions for 2001–17 at quarterly frequency. ### Results - Two assessment measures: - (a) Weight of the implicit anchor in explaining inflation expectations (higher weight at a given horizon implies tighter anchoring). - (b) Level of the implicit anchor. - Degree of anchoring: - Anchoring generally improved over time. - Anchoring was stronger for analysts than for businesses and trade unions. - Anchoring was weakest during 2006–13 for all agents. - Anchoring for businesses worsened from 2001–08 to 2010–17 to a similar extent as for trade unions, suggesting businesses increasingly influenced by wage setting. - Estimated anchor levels (implied inflation anchors): - Analysts: roughly 5–5.5 percent (below the upper end of the target range). - Businesses: in the range of 6.5–7 percent (above the target range). - Trade unions: in the range of 7–8 percent (above the target range). - The anchor for businesses declined initially but then trailed the anchor for trade unions. - The anchor for trade unions fell in the final few rolling samples by some 1.5 percentage points to around 6.5 percent, possibly reflecting protracted low economic growth denting wage growth prospects. ### Policy Implications - Objective: - Maintaining low and stable inflation enhances central bank credibility and reduces inflation expectations. - Current assessment: - The SARB has stabilized inflation expectations but at levels around the upper end of the 3–6 percent official target range. - Business and trade unions—critical for domestic inflation dynamics—have kept the implicit inflation anchor above the official target range and it has drifted away (analysis uses data through 2017Q4). - Structural policy recommendations: - Increase flexibility in labor and product markets to help lower inflation and inflation expectations: - Greater labor market flexibility should allow wages to align more with productivity gains. - Lower barriers to entry and greater competition in product markets should reduce input costs for households and businesses. - Considerations to enhance the inflation targeting (IT) framework: - Assess the merit of setting a midpoint target to emphasize price stability and better anchor expectations while allowing greater monetary policy flexibility than a range target. - Proposed sequence: - Initially set a point target at 4.5 percent with a tolerance of ±1½ percentage points. - Subsequently reduce the point target to 4 percent and tighten the tolerance to ±1 percentage point. - Rationale: - An integer point target would clarify communication of the IT framework. - When IT was introduced, the SARB intended to tighten the official target range to 3–5 percent. - A tighter range would be consistent with inflation performance of South Africa’s trading partners, which guided the original 3–6 percent decision two decades ago. - Related fiscal/monetary context from Appendix I (selected exact figures): - The SARB reduced policy rates by 25 basis points in July 2017 and another 25 basis points in March 2018 to 6.5 percent. - Public debt projected by the authorities to peak at 56 percent of GDP in 2021/22 (subject to risks). *Annex IX. How Robustly are Inflation Expectations Anchored? (cr18246).* ### Appendix II. Implementation of FSAP Recommendations ### Appendix II. Implementation of FSAP Recommendations ### Twin Peaks Reform - Priority Recommendation 1: Define clear and comprehensive institutional, governance and accountability arrangements for prudential and market conduct regulation, including National Credit Regulator (NCR) and other relevant institutions. - Progress Update: - The Financial Sector Regulation Act No. 9 of 2017 (FSR Act) was signed into law on 21 August 2017 and came into effect on 1 April 2018. - The FSR Act (a) gave the SARB an explicit mandate to maintain and enhance financial stability; (b) created a prudential regulator, the Prudential Authority (PA), responsible for regulating banks, insurers, cooperative financial institutions, financial conglomerates and certain market infrastructures; and (c) established a market conduct regulator, the Financial Sector Conduct Authority (FSCA), located outside of the SARB. - The FSR Act prescribes Memoranda of Understanding between the financial sector regulators, including the NCR. - Priority Recommendation 2: Publish a roadmap for regulatory reform, with adequate resource allocation, monitoring, and evaluation, to carefully implement the move to twin peaks and minimize transition risks. - Progress Update: - In terms of the FSR Act (clause 47), the PA must within 6 months from the date of its establishment adopt a regulatory strategy on how to achieve its objectives and perform its regulatory and supervisory functions. The regulatory strategy will be published on the PA’s website. - Sixty staff members from the former Financial Services Board (FSB) and the Cooperative Banks Development Agency (CBDA) were moved to the PA in October 2017. ### Micro-Prudential - Priority Recommendation 3: Strengthen group-wide supervision of financial conglomerates, focusing on interconnectedness by monitoring intra-group transactions and aggregate exposures, and conducting joint on-site visits. - Progress Update: - The former Bank Supervision Department of the SARB and FSB conducted joint supervisory visits and reviews prior to the promulgation of the FSR Act. - The PA and FSCA will continue to cooperate closely. The PA will regulate financial conglomerates, including related non-financial entities. - A separate Conglomerate Supervision Department has been established within the PA and a draft “Financial Conglomerate Supervision Framework” was published on the PA’s website on 26 March 2018. - Priority Recommendation 4: Clarify objectives and strengthen the operational independence of all financial sector supervisors in the relevant legislation in line with international standards. - Progress Update: - The FSR Act provides the objectives of the PA (section 33) and FSCA (section 57). The PA’s primary objective is to promote and enhance the safety and soundness of financial institutions/market infrastructures and assist in maintaining financial stability. - Sections 34 and 58 of the FSR Act require the financial sector supervisors to perform their functions without fear, favor, or prejudice and provide for appropriate and effective governance systems and processes. - Appointment, term, and grounds for removal for the PA CEO and the Commissioner and Deputy Commissioners of the FSCA are now provided for under the FSR Act. The PA’s CEO and the FSCA’s Commissioner and Deputy Commissioners may be appointed for a period not exceeding 5 years and are eligible for reappointment for one further term. - Financial sector supervisors must adopt and publish a regulatory strategy, reviewed and updated at least annually, addressing transparency and accountability requirements. - Regulators determine their own budgets and fees/levies through a transparent process involving public consultation. Memoranda of understanding among regulators are required by the FSR Act and are currently being drafted. - Priority Recommendation 5: Enhance regulatory requirements of Collective Investment Schemes (CIS), particularly for disclosure, valuation and accounting, introduce variable net asset valuation, and strengthen the supervision of CIS managers. - Progress Update: - The draft NAV Calculation Standard was circulated to industry; comments are being reviewed. Industry workshops were held during December 2017. - Guidelines are being developed to publish with the standard; aspects require re-work following meetings with ASISA. - Board Notice 90 is under review; structural changes including adding chapters on ETFs and benchmarking against IOSCO principles are being considered. - Board Notice 92 of 2014 (disclosure requirements) is under review; additions from BN 90 and the NAV Calculation standard will be accommodated. - Priority Recommendation 6: Fully implement the Solvency Assessment and Management (SAM) regime and Treating Customers Fairly Initiative (TCF); give high priority in legislation to protecting policyholder rights and entitlements. - Progress Update — SAM: - The PA is responsible for prudential aspects of insurance supervision. The Insurance Act, promulgated on 18 January 2018 will take effect on 1 July 2018 and give effect to the SAM framework. - SAM introduces a forward-looking risk-based approach to solvency, aligning capital requirements with underlying risks; its primary objective is the protection of policyholders and beneficiaries. - Additional objectives: alignment of capital requirements with risks; proportionate, risk-based supervision for small/large insurers and cross-border groups; incentives for sophisticated risk monitoring/management; maintenance of financial stability. - SAM is principles-based on an economic balance sheet and utilizes a three-pillar structure: Pillar 1 (capital adequacy), Pillar 2 (systems of governance), Pillar 3 (reporting requirements). - Substance of SAM will be given effect via Prudential Standards issued under the Insurance Act. On 9 March 2018, draft Prudential Standards (Financial Soundness and Governance Standards) were published for public comment. Comments are due on 23 April 2018. Full implementation is envisaged to take effect on 1 July 2018. - Progress Update — TCF: - TCF conduct matters are being implemented by the FSCA through its TCF Roadmap. - The Conduct of Financial Institutions Bill (CoFI Bill) is being drafted, consolidating 13 sectoral laws, and will further enhance customer rights. The CoFI Bill will be published for public comment during 2018. - Policyholders and depositors’ rights and entitlements will be addressed as part of amendments to the FSR Act. - Retail Distribution Review (RDR) materials: update published December 2015; “Status Update: Retail Distribution Review––status as at December 2016” published December 13, 2016. The RDR discussion document (November 2014) proposed 55 specific regulatory objectives to be implemented in three phases aligned with Twin Peaks. - Proposed amendments to Regulations under the Long-term Insurance Act, 1998 and Short-term Insurance Act, 1998 (RDR Phase 1) were gazetted on 15 December 2017 with an effective date of 1 January 2018. - Proposed replacement of the Policyholder Protection Rules (PPRs) was gazetted on 15 December 2017 with an effective date of 1 January 2018; the amendment codifies TCF principles to a large extent. ### Macro-Prudential - Priority Recommendation 7: Continue building a top-down stress test framework for both the banking and insurance sectors and give SARB more resources for data collection and analysis. - Progress Update: - During 2015/16, the Financial Stability Department (Finstab) developed a top-down (TD) and bottom-up (BU) stress testing framework; an exercise was run in 2016. Aggregated results were published for the first time by SARB in the first edition of the FSR of 2016. - Two independent assessments/peer-reviews were conducted by the Deutsche Bundesbank and the IMF; suggestions were incorporated into the updated framework of 2018. - In 2017 the IMF provided TA to improve and expand the SARB stress testing framework to include market and liquidity risk in addition to solvency. The TA comprised two phases concluded in April 2018. - The 2018 TD and BU stress testing cycle is underway and results should be published at the end of 2018. The current stress test only includes the banking sector. ### Financial Safety Nets - Priority Recommendation 8: Introduce a resolution regime compliant with the Key Attributes for, and make the SARB the resolution authority of, all banks and SIFIs. - Progress Update: - In August 2015, National Treasury (NT), SARB and FSB-SA jointly published a discussion paper “Strengthening SA’s resolution framework for financial institutions” for public comment and held public consultations. - Proposals from the discussion paper have been incorporated into draft legislation to be published as amendments to the FSR Act. Legislation will designate the SARB as resolution authority and provide additional powers, including the ability to assign losses to shareholders and creditors through write down and conversion (building on the 2015 amendments to the Banks Act, 1990). - Legislation will also allow for establishment of an explicit deposit insurance scheme for South Africa. - Priority Recommendation 9: Adopt depositor preference and introduce an ex- ante funded deposit insurance scheme, with a back-up credit line from the National Treasury. - Progress Update: - The SARB, in cooperation with National Treasury, published a policy paper on 30 May 2017 with proposals for establishment of a deposit insurance scheme (DIS) for South Africa. These proposals have been incorporated into draft legislation as amendments to the FSR Act. - Detailed reporting and funding requirements from banks to the DIS will be included in standards to be issued after adoption of the legislation. - The level of deposit insurance coverage is to be R100 000 per covered depositor per bank. - Funding of the DIS will be on an ex ante basis. The funding mechanism will have three tiers: an equity layer (premium contributions by banks), a liquidity layer (loans from banks to the DIS) and emergency funding by the SARB. - The equity and liquidity layers together will provide a fund size of approximately 3 percent of total covered deposits. - Under the draft legislation, covered depositors will have depositor preference in a resolution. If pay-out of covered depositors takes place, the covered depositors’ claims against the failed institution will become subrogated to the DIS. - Priority Recommendation 10: Remove constraints to early intervention powers and improve legal protection for resolution officials. - Progress Update: - Proposed amendments to the FSR Act will create a strengthened resolution framework providing the SARB with flexibility and powers to take prompt action when a bank or SIFI fails, or is likely to fail, to mitigate preventable loss of value. - Envisaged legislation will provide the SARB and its officials with sufficient legal protection when conducting a resolution or exercising resolution-related powers. ### OTC Derivatives Market Reforms and Oversight - Priority Recommendation 11: Improve data collection of OTC derivatives and enhance surveillance of the OTC derivatives market. - Progress Update: - In January 2018, the Minister of Finance gazetted Regulations in terms of the Financial Markets Act, 2012 to clarify aspects of the regulatory framework for OTC derivative transactions and financial market infrastructures (FMIs). - For OTC derivative transactions, the Regulations introduce the concept of an OTC derivative provider (ODP) as a new category of “regulated person”; require reporting of OTC derivative transactions to a trade repository (TR); and incentivize clearing through a central counterparty (CCP). - The FSCA, with the concurrence of the PA, will determine eligibility criteria for OTC derivative transactions to be subjected to mandatory clearing. - For FMIs, the Regulations set requirements for approval of an external central securities depository (CSD) as a participant and for establishing an external link with an external CSD; set assets and resources requirements for exchanges, CSDs, and TRs; and create a regulatory framework for licensing and regulation of CCPs. - The FSCA has submitted conduct standards to Parliament: (i) the Code of Conduct for ODPs; (ii) the Criteria for Authorization of an ODP; and (iii) the Reporting Obligations for OTC derivative transaction reporting to a licensed trade repository. - The PA and FSCA submitted the Joint Standard on the Requirements and Duties of a Trade Repository to Parliament. These standards are expected to be implemented in 2018. - PA and FSCA are revising the Joint Standard on Margin Requirements for Non-Centrally Cleared OTC Derivative Transactions; anticipated to be released for final public consultation and submitted to Parliament during August 2018. - A Financial Markets Implementation Committee (formerly the OTC steering committee) consisting of officials from NT, FSCA, the PA and SARB has been established to provide strategic inputs and policy coordination on the OTC reform agenda. - Given the large size of the OTC derivative market, timely data collection is vital for risk monitoring. - Priority Recommendation 12: Consider establishing a local CCP, with credit lines to the central bank and securities collateral placed at a central securities depository to reduce dependency on local banks. - Progress Update: - Consequential amendments to the Financial Markets Act, 2012 (affected by the coming into force of the FSR Act, 2017) and the Ministerial Regulations issued in January 2018 create an enabling framework for licensing and regulation of a CCP. - JSE Clear currently operates as an associated clearing house licensed in terms of the Financial Markets Act, 2012. - In terms of consequential amendments to FMA 2012, a clearing house performing functions of a central counterparty must comply with requirements imposed by regulations or standards, and must until 31 December 2021 be licensed as either an associated clearing house or an independent clearing house, and be approved by the PA to perform CCP functions; as of 1 January 2022, be licensed as both an independent clearing house and a central counterparty. ### Competition, Payments, and Market Access - Priority Recommendation 13: Adopt international best practices on provision and disclosure of market information to retail customers and to potential entrants into the payments and clearance systems. - Progress Update: - The National Payment System Act, 1998 (NPS Act) does not specifically provide requirements for payment participants in relation to retail customers. - The National Payment System Department (NPSD) has applied CPSS Core principles for systemically important payment systems and subsequently CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs), but these principles have not been formally adopted into domestic law. - The FSR Act provides for conduct regulation of payment services providers (PSPs) by the FSCA for consumer protection purposes and legal authority for regulation and supervision of PSPs and their conduct in relation to retail customers. - The FSCA is developing the COFI Bill which will apply to PSPs and include provisions on disclosure to retail customers. The NPSD is part of the Working Group on the COFI Bill. - NPSD is reviewing the NPS Act to align it with the FSR Act and international standards, including the PFMIs. Section 6A (3), (4) and (5) of the NPS Act make provision for market access. Once PFMIs are adopted, provisions will be aligned to PFMIs on access and participation and public policy on disclosure and transparency. - Priority Recommendation 14: Adopt a rules-based entry and exit framework, and lower entry hurdles to the financial system. - Progress Update: - NPSD is reviewing the NPS Act to address entry and exit frameworks in line with the PFMIs and international standards. - NPSD has taken a policy view to include a broader definition of payment services in the NPS Amendment Bill and to ensure NPS is more accessible to non-banks. - It is envisaged that restrictions relating to bank sponsorships for non-banks in clearing and settlement systems would be removed, provided non-banks meet entry requirements to increase competition in the NPS (remittance, mobile money/payments, clearing and settlement). - The proposal is included in the NPS Act Review Policy paper to be submitted to Treasury during the second half of 2018 for translation into the NPS Amendment Bill. *Source: cr18246 - Appendix II. Implementation of FSAP Recommendations.* ### Appendix III. Summary of Capacity Development Strategy ### Appendix III. Summary of Capacity Development Strategy ### Macroeconomic Environment - Reviving real GDP growth and fighting high unemployment by implementing sound reforms is a key priority for South Africa. - Other priorities are recalibrating the fiscal policy stance, and continuing to implement cautious monetary policy. - Structural reforms to make labor and product markets more flexible, and measures to improve governance are the main policy levers to boost growth and make it more inclusive. Higher productivity and competitiveness would strengthen the economy’s resilience to shocks and bring more citizens to the labor force. - The nation faces the triple challenges of maintaining debt sustainability, safeguarding the fragile recovery, and addressing demands for social spending. - The recent recovery in investor confidence, boosted by announcements of the new administration, should help. - As inflation expectations are anchored close to the top of the official target band, and external conditions could turn less supportive, the current inflation targeting framework needs to be maintained. It could be upgraded at an opportune time to lower inflation expectations. - Exchange rate flexibility should remain the main policy response tool. ### CD Assessment - Technical assistance (TA) in South Africa is highly (and appropriately) demand-driven. - The country’s strong institutions often preclude the need for traditional TA. - Given the overall strength of institutions, Fund surveillance has relatively limited impact on capacity development, although it does have an impact on economic policy. - Highly focused capacity development (CD) initiatives (mainly peer-reviewing) on issues that the authorities care about—such as the recent MCM TA on stress testing in a Basel III environment—worked well. - The authorities particularly appreciate Fund peer reviews on on-going policy initiatives, and joint analytical workshops. Recent examples include: - a staff assessment of the South African Reserve Bank (SARB)’s monetary policy analysis model (QPM), - a review of the paper on proposed SARB macroprudential framework (deposit insurance). ### CD Priorities (overview) - Priority areas relate to: - monetary policy, financial stability, and crisis management for the SARB; - tax collection and administration for the South African Revenue Service (SARS); - risk management, public investment efficiency, and adoption of GFS reporting for the National Treasury (NT); - property prices for Statistics South Africa (STAT SA). ### Authorities’ Views - Authorities broadly agreed with the staff assessment of CD priorities. - The SARB highlighted the need for international partners to continue peer-reviewing South Africa’s: - (i) transition to the twin peaks model; and - (ii) enhancement of micro- and macro-prudential frameworks. - Treasury officials highlighted the need to urgently address significant skill gaps in the area of financial risk management at all levels (technical staff, management, and as an organization). - In particular, the implementation of legislation, policies, and procedures needs to be elevated to an “acceptable level”. ### South Africa: Capacity Development Priorities and Objectives - SARB - Strengthen stress testing technical capacity. - Enhance the technical capacity to assess independently banks’ models within a Basel III environment. - Enhance the micro and macro prudential frameworks. - Support the transition to the twin peaks model, as well as the exploration of macroprudential policy, including its instruments. - Strengthen the monetary policy framework. - Enhance the projection models to support monetary policy, its communication, and its coordination with fiscal policy. - Carry out analytical projects to help support greater anchoring of inflation expectations. - Enhance the crisis management framework. - As a first step, identify areas with room for enhancement in collaboration with MCM. - Promote Fintech developments. - Assist the authorities in Fintech and other payment innovations. - SARS - Enhance capacity to confront base erosion and profit shifting. - Reduce revenue leakages from multinational companies. - More generally, increase tax administration capacity. - Help develop new reform baseline and refine medium-term plans. - National Treasury - Enhance risk management capacity across all three spheres of the government. - Use long term expert to support the development of risk management capacity. - Help the authorities maintain the competency framework for risk management (including SOE risks), develop occupational qualifications, and carry out training. - Adopt GFS reporting of the fiscal accounts. - Assist NT staff to adopt GFS. - Enhance public investment efficiency. - Undertake a PIMA assessment. - Promote capital market development. - Assist the authorities particularly in the structuring of municipal bond markets. - STAT SA - Expand the capacity to compile property price indices. - Facilitate monitoring of property prices. ### Relations with the IMF and Financial Data (selected items) - Membership Status - Joined: December 27, 1945. - Accepted the obligations of Article VIII Sections 2, 3, and 4 of the IMF’s Articles of Agreement on September 15, 1973. - General Resources Account (SDR Million and %Quota) - Quota: 3,051.20 100.00 - IMF holdings of currency: 2,640.61 86.54 - Reserve tranche position: 410.62 13.46 - New arrangements to borrow: 36.60 - SDR Department (SDR Million and %Allocation) - Net cumulative allocation: 1,785.42 100.00 - Holdings: 1,493.03 83.62 - Outstanding Purchases and Loans: None - Latest Financial Arrangements (historic entries) - Stand-By Nov 03, 1982–Dec 31, 1983: Amount Approved 364.00 (SDR million), Amount Drawn 159.00 (SDR million) - Stand-By Aug 06, 1976–Aug 05, 1977: 152.00 approved, 152.00 drawn - Stand-By Jan 21, 1976–Aug 06, 1976: 80.00 approved, 80.00 drawn - Projected Payments to the IMF (SDR million; based on existing use of resources and present holdings of SDRs) - Charges/interest: 2018: 1.84; 2019: 2.45; 2020: 2.45; 2021: 2.45; 2022: 2.45 - Total: 2018: 1.84; 2019: 2.45; 2020: 2.45; 2021: 2.45; 2022: 2.45 - Exchange rate arrangement - The rand floats against other currencies and South Africa maintains an exchange system consistent with obligations under Article VIII of the IMF’s Articles of Agreement. - South Africa’s de-jure exchange rate arrangement is free floating and the de-facto arrangement is floating. - All exchange controls on nonresidents were eliminated with the abolition of the financial rand in 1995. - Exchange controls on capital transactions by residents have been gradually relaxed; the authorities’ main objective has been to move toward a system based on prudential limits and supervision. ### Technical Assistance (selected missions) - Fiscal Affairs Department (FAD) - April 2013: FAD TA mission visited Cape Town to support establishment of a new Parliamentary Budget Office (PBO). - August 2013: FAD mission visited Pretoria to discuss options for National Treasury to strengthen performance management systems. - December 2013: National Treasury and FAD held a joint workshop on fiscal risks. - June 2014: FAD missions provided advice on expenditure reviews and options for strengthening the PBO; mission visited SARS to conduct a pilot of the Tax Administration Diagnostic Assessment Tool (TADAT). - August 2014 and January 2015: FAD mission on VAT gaps (supporting the Davis Tax Committee). - January and November 2015: Missions on natural resource taxation. - March 2015: FAD mission on public sector balance sheets. - December 2015: Workshop on wage bill management and PBO analysis. - March 2016: Follow-up on review of mining and petroleum fiscal regimes. - June 2018: FAD mission assisted National Treasury in developing a fiscal stress testing framework for South Africa. - Monetary and Capital Markets Department (MCM) - May 2014: MCM mission training on banking sector stress test for the SARB. - August 2015: MCM seminars on stress testing. - July 2017 and March 2018: MCM missions assisted the SARB in enhancing its stress testing framework. - Legal Department (LEG) - January 2015: LEG mission provided technical assistance on fiscal law of the extractive industries (with FAD). - Statistics Department (STA) - March 2018: STA mission assisted Statistics South Africa (SSA) in assessing the potential for developing an official residential property price index. ### JMAP (World Bank–IMF) Coordination and Analytical Work - IMF South Africa team led by Ms. Ana Lucía Coronel met with World Bank South Africa team led by Mr. Paul Noumba Um in June 2018 to discuss macrocritical structural issues. - Teams agreed macroeconomic challenges include promoting job creation and improving long-run inclusive growth needed for social cohesion and macroeconomic stability. - Information requests and timing: - IMF asks to be kept informed of progress in macrocritical structural reform areas under the World Bank’s purview (product and labor markets and governance). Timing: when milestones are reached or in the context of missions (and at least semiannually). - World Bank asks to be kept informed of progress in macrocritical structural reform areas under the IMF’s purview (fiscal, monetary, and financial sector policies). Timing: when milestones are reached (and at least semiannually). - IMF Analytical Work Program (selected items) - Macro-financial linkages in South Africa - Central bank credibility - Inflation expectations - Inflation and inequality - Fiscal policy and inequality - Drivers of public debt accumulation - Corruption and governance - Buffers and vulnerabilities - Digitalization - Financial Inclusion - Education - Joint products in the next 12 months - Coordination on structural reform advice ### Statistical Issues (as of June 2018) - General: Data provided to the IMF are adequate for surveillance. - National Accounts: - GDP data compiled according to SNA2008, with a base year of 2010. - SSA now compiles GDP by production and has taken over GDP by expenditure from SARB. - Labor market statistics: - Quarterly labor market statistics are published one month after the end of the previous quarter. - A new Quarterly Labor Force Survey (QLFS) was launched in January 2008; since 2015 a new Master Sample based on the 2011 census data was introduced. - Price Statistics: - The consumer price index (CPI) covers all households living in metropolitan and urban areas. - Current CPI weights are based on data gathered by SSA in the Living Conditions Survey (LCS) 2014/2015, supplemented by other sources. - Indices in the CPI are based to 100 at December 2016. - Government Finance Statistics: - To move toward fiscal analysis based on the GFS Manual 2014, fiscal data provided for surveillance by the Treasury and data reported to IMF’s STA for GFS database need to be fully reconciled. - Treasury Department’s fiscal data covers part of general government and do not include corresponding balance sheet data; GFS data compiled by SARB cover all general government subsectors and include balance sheet data. - Monetary and Financial Statistics: - Monetary statistics compiled by the SARB are consistent with the Monetary and Financial Statistics Manual. - South Africa reports regular and good quality monetary statistics for publication in the IFS; there is room to improve timeliness of data on other financial corporations. - Financial sector surveillance: - South Africa reports Financial Soundness Indicators (FSIs) to the Fund. - All core and 11 encouraged FSIs for deposit takers are reported monthly. - The remaining two encouraged FSI for deposit takers, two encouraged FSI for the real estate sector, and two encouraged FSI for households are reported quarterly. - External Sector Statistics: - Balance of payments and international investment position data are reported quarterly and are broadly consistent with BPM6. - Improvements made in coverage of trade flows within SACU in 2013. - Work is needed to improve reliability and accuracy of balance of payments data to reduce errors and omissions. - Data on international reserves are disseminated in line with the IMF’s Data Template on International Reserves and Foreign Currency Liquidity. - South Africa participates in the IMF’s CPIS and CDIS. ### Table of Common Indicators Required for Surveillance (selected entries, as of June 29, 2018) - Exchange rates: Date of Latest Observation 6/28/2018; Date Received 6/28/2018; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 5/31/2018; Date Received 6/7/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Reserve/base money: Date of Latest Observation 4/30/2018; Date Received 5/31/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Broad money: Date of Latest Observation 4/30/2018; Date Received 5/31/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Central bank balance sheet: Date of Latest Observation 5/31/2018; Date Received 6/7/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Consolidated balance sheet of the banking system: Date of Latest Observation 4/30/2018; Date Received 5/31/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Consumer Price Index: Date of Latest Observation 4/30/2018; Date Received 5/31/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Revenue, expenditure, balance and composition of financing – general government: FY17/18; Date Received 2/22/2018; Frequency Y; Frequency of Reporting Y; Frequency of Publication Y - Revenue, expenditure, balance and composition of financing – central government: Date of Latest Observation 4/2018; Date Received 5/31/2018; Frequency M; Frequency of Reporting M; Frequency of Publication M - Stocks of central government and central government-guaranteed debt: Date of Latest Observation 3/2018; Date Received 3/22/2018; Frequency M; Frequency of Reporting Q; Frequency of Publication Q - External current account balance: Q1 2018; Date Received 6/21/2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q - GDP/GNP: Q1 2018; Date Received 6/06/2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q - Gross external debt: 12/31/2017; Date Received 3/29/2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q - International investment position: 12/31/2017; Date Received 3/29/2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q ### Statement by South African Authorities (extract) - Authorities appreciate candid engagements during the 2018 Article IV Consultation and look forward to further interactions with and advice from the Fund on policies to raise potential output and improve resilience. - The recent change in political leadership presents an important opportunity; the new administration is focused on reducing high unemployment, poverty, and inequality; addressing long-running impediments to growth; increasing investment; accelerating reforms; protecting the most vulnerable; and improving governance. - Recent macroeconomic complications include slow growth; structural challenges; deterioration in financial position of state-owned entities; policy uncertainty; and exogenous shocks (fall in commodity prices and a historic drought). - Nonetheless, the economy has maintained strong fundamentals: a diverse industrial base, deep and liquid domestic capital markets, a flexible exchange rate and effective inflation targeting, strong institutions, and the newly-enhanced financial stability framework. - Recent developments and outlook (selected figures and observations): - Agriculture grew by 17.7 percent in 2017 following two consecutive contractions as a prolonged drought ended. - Mining sector growth was 4.6 percent in 2017, compared to a contraction of 4.2 percent in 2016. - A larger merchandise trade surplus in 2017 partially offset the deficit in services, income and transfers, narrowing the current account deficit from 2.8 percent of GDP in 2016 to 2.5 percent in 2017. *Source: cr18246 - Appendix III. Summary of Capacity Development Strategy (June 2018).* ### 2017. With positive supply side shocks during 2017 and slow private credit extension, ### cr18246 - 2017. With positive supply side shocks during 2017 and slow private credit extension, ### Economic outlook and short-term developments - Inflation slowed from 6.4 percent in 2016 to 5.3 percent in 2017, reaching 4.6 percent in June 2018. - High-frequency data and global forecasts during Q1 2018 indicated a strong recovery in household consumption and a rebound in private investment following the change in political leadership. - Authorities projected a growth rate of 1.5 percent for 2018 and 1.8 percent in 2019. - Authorities recognize the opportunity to accelerate growth to be in line with the reform scenario presented by staff to address high unemployment, poverty and inequality. - Balance of risks since the tabling of the 2018 Budget have tilted downwards due to: - international trade tensions affecting South Africa’s largest trading partners; - a stronger dollar and higher US bond yields; - changing sentiment towards emerging markets leading to lower capital flows; - global oil prices trending up. ### Fiscal policy and debt management - Primary objective of the 2018 Budget: reduce the budget deficit and stabilize debt as a share of GDP over the medium term. - Fiscal consolidation plans envisage a primary deficit approaching zero in 2021, with the consolidated budget deficit declining from 4.3 percent in 2018 to 3.5 percent in 2021. - Overall expenditure ceiling revised downward by R5.8 billion or 0.1 percent of GDP after reprioritization of spending. - New revenue measures implemented amount to 0.7 percent of GDP in 2018/19, including: - an increase in the VAT rate; - limiting personal income tax bracket adjustments for inflation; - an increase in the fuel levy and excise duties. - Under the baseline growth scenario: - non-interest government spending is expected to remain within the ceiling, translating to 26.6 percent of GDP. - these actions should help stabilize the debt ratio at around 56.2 percent of GDP in 2022/23. - Policy adjustments and actions by authorities: - appreciating staff’s recommendations on government spending and debt dynamics and seeking further bilateral engagement; - taking measures to rein-in government spending, including reducing staff numbers and compelling government departments to remain within allocated budgets despite higher unit labor costs from the latest wage agreement; - plans for an updated employee-initiated severance package (EISP) and early retirement arrangements to reduce headcounts, especially within non-critical functions. - State-owned enterprises (SOEs): - corporate boards and management teams of large SOEs such as ESKOM and South African Airways have been dismissed and new teams tasked with developing financial recovery plans. - authorities agree that stronger conditions are required before granting sovereign debt guarantees and are finalizing measures. - authorities cognizant of high fiscal risk posed by SOEs, including the national airline, and are exploring long-term solutions including greater private sector participation. - External risk buffers and financing strategy: - flexible exchange rate identified as a key buffer; - portfolio benchmarks limit foreign-currency debt to 15 percent of the total portfolio; - domestic markets will remain primary source of government borrowing; - bond-switch program (exchanging shorter-dated bonds for longer maturities) will continue. - Social and distributional policy: - fiscal policy will continue to provide for poverty reduction and progressivity through high-coverage protection for the most vulnerable, including social grants that will increase above inflation over the medium-term, and the zero rating of VAT for basic foodstuffs and goods. ### Monetary policy - The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered the repurchase rate to its current level of 6.5 percent per annum, with additional accommodation in July 2017 and March 2018. - At 6.5 percent per annum, the MPC assesses the stance of monetary policy to be accommodative and appropriate given the current state of the economy. - During the MPC meeting on July 19, 2018: - the MPC signaled that the bottom of the inflation cycle had been reached. - inflation is expected to remain within the inflation target range of 3-6 percent over the medium term, but risks are tilted to the upside. - main drivers of risk include oil prices, rand weakness due to shifting emerging market sentiment, higher domestic electricity prices, and changes in global monetary settings. - MPC’s approach: look through first-round effects and focus on second-round effects; will remain vigilant and act if second-round effects move inflation significantly away from the mid-point of the target range. - Reserves and exchange rate: - authorities committed to a flexible exchange rate as an external buffer and to accumulating reserves where opportunities arise, including from FDI flows. - At the end of December 2017, international reserves remained close to end-2016 levels, at around 5 months of projected imports. ### Financial sector policy and performance - Financial Sector Regulation Act signed into law in August 2017; Twin Peaks regulatory framework implementation commenced on April 1, 2018 with the launch of the Prudential Authority and the Financial Sector Conduct Authority. - Financial Intelligence Center Act (FICA) enacted; country fully aligned with current international standards on AML/CFT. - Periodic stress tests and on-site inspections (including AML/CFT checks) have been institutionalized and will in due course include insurance companies. - Work ongoing on a new resolution framework that will include the establishment of an explicit deposit insurance scheme for banks. - Banking system indicators and outcomes: - system remains sound with high capital adequacy and liquidity ratios. - return-on-equity maintained between 16 percent and 17.4 percent. - after tax profits increased by 7.6 percent in 2017. - Authorities view vulnerabilities of smaller banks as not of systemic importance in isolation but remain vigilant; recent failures of African Bank and VBS Bank were handled effectively with broadly successful protection of depositors. - Financial inclusion and competition: - granting of two new banking licenses in 2017 expected to increase competition and expand financial services provision. - noted improvement in lending to small and medium-sized enterprises (SMEs); authorities will work to further improve SME access to credit. ### Structural and governance reforms - New administration committed to reducing policy uncertainty, improving policy implementation, and strengthening governance. - Accelerated initiatives and reforms: - independent power producers (IPP) program accelerated; - resolving delays in finalizing the mining charter and legislation on mineral and petroleum exploration; - finalizing a Single Transport Economic Regulator Bill to improve transport sector efficiency; - reviewing programs contributing to inefficiency, including tax incentives to certain industries; - amending public procurement legislation to align disparate procurement regulations across the state; - pursuing greater private sector participation in network industries and exploring a mass restructuring of the electricity/energy market. - Regional integration: - recently signed the African Continental Free Trade Area (CFTA) with the African Union and proceeding with ratification through Parliament. - Anti-corruption and governance actions: - judicial system effective in applying legal sanctions; - judicial commission appointed to investigate administrative, legal, and ethical violations in the South African Revenue Service (SARS); - across state institutions, high-level officials have been suspended, dismissed, or placed under disciplinary action; in some cases criminal indictments issued and judicial processes are underway; - authorities assessing legal and enforcement gaps that contributed to “state capture”. ### Conclusion and policy priorities - Raising the level of potential growth is the most important medium-term objective. - Authorities will continue to: - attract investment and rebuild confidence; - stabilize public finances and place public debt on a sustainable path; - maintain inflation targeting and a free-floating exchange rate as vital policy buffers. *IMF country report excerpt (cr18246).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18246.pdf_