## 1zafea2020001

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### Persistently weak growth — key findings
- Annual output growth averaged about 4 percent in the early and mid-2000s, then fell to slightly above 1 percent as private investment’s contribution to growth declined and total factor productivity (TFP) growth became negative.
- Annual growth reached 0.2 percent in January-September 2019; per-capita GDP growth set to contract for the fifth year in 2019.
- Growth recently sustained by private consumption; investment and exports are a drag.
- Structural rigidities and governance weaknesses have left growth on a declining trend, preventing South Africa from benefitting from the global recovery.
- Growth decelerated from the 2000s to the 2010s; business confidence indicators remained structurally depressed and fell to very low levels in 2019.

### Labor, poverty, and inequality
- Unemployment is 29 percent; youth unemployment is about double the overall rate.
- South Africa’s Gini coefficient is above 0.6 (Gini coefficient (2015) 63).
- Vulnerable groups: children, the elderly, and Black Africans, especially women.
- Social grants have a progressive impact but are not substitutes for private-sector led job creation.
- Real GDP per capita (annual percent change): 2014: 0.3; 2015: -0.3; 2016: -1.1; 2017: -0.1; 2018: -0.7; 2019: -1.1; 2020: -0.7; 2021: -0.5.

### Macro-financial environment and market signals
- Nonresident investors have been net sellers of portfolio assets (mainly equity); the rand and government yields have traded weaker than “fair values.”
- Sovereign placed $5 billion in Eurobonds in September 2019; the auction was oversubscribed (2.7x).
- Official reserves are at 70 percent of the unadjusted reserve adequacy (ARA) metric and 77 percent of the ARA metric adjusted for capital flow management measures.
- Gross external financing needs were 18 percent of GDP (2018); staff projects GEFNs to fluctuate around 20 percent of GDP during 2019–24.
- External debt and external flows:
  - External debt: 2018: 46.8 percent of GDP; projected to remain slightly above 50 percent of GDP over medium term.
  - Net purchases of bonds by nonresidents (billions of U.S. dollars): 2014: -5.1; 2015: -2.3; 2016: -2.4; 2017: 1.7; 2018: -6.7; 2019: -2.3.

### Fiscal developments, SOEs, and fiscal risks
- Staff projects the government deficit to reach 6½ percent of GDP in FY19/20 (2 percentage points of GDP higher than in FY18/19).
- About one half of the FY19/20 deficit increase is projected to be driven by transfers to SOEs; the remainder mainly by other transfers, compensation, and interest costs.
- Tax revenue relative to output is one of the largest in EMs; the wage bill-to-GDP ratio is among the highest.
- SOE fiscal costs and contingent liabilities:
  - Eskom’s debt is around 10 percent of GDP; Eskom assets estimated at 16 percent of GDP.
  - Direct cost of Eskom to the budget exceeded 9 percent of GDP cumulatively between FY08/09 and FY18/19 (direct transfers 6 percent of GDP plus debt service costs).
  - Government committed exceptional financing to Eskom equivalent to 4¾ percent of GDP over 10 years (2⅓ percent over the next 3 years).
  - Guarantees to SOEs account for 10.5 percent of GDP; total contingent liabilities increased from 8 percent of GDP in FY07/08 to 18 percent in FY18/19.
- Baseline staff projections foresee government debt rising to 77 percent of GDP by 2023 and above the 70 percent high-risk threshold by 2022 under limited adjustment and continued SOE bailouts.
- Public debt (percent of GDP): 2016: 51.5; 2017: 53.0; 2018: 56.7; 2019: 60.8; 2020: 65.3; 2021: 69.6; 2022: 73.5; 2023: 77.1.

### Eskom — macro-criticality and causes
- Eskom provides 90 percent of domestic electricity consumption and exports energy to regional neighbors.
- Eskom’s debt represents almost 10 percent of GDP, of which 80 percent is guaranteed by the government.
- Key financial and operational weaknesses: corruption, delays in debt-financed investments, expensive procurement, cost-overruns, reliance on outdated plants, low cashflow, delayed maintenance, declining electricity demand, failed collection from municipalities, high input and employment costs (workforce increased by 50 percent since mid-2000s; wages up 50 percent in real terms since mid-2000s).
- Actions taken: replaced board and management; appointed chief restructuring officer; published a roadmap and resource plan. Remaining challenges: elevated coal costs, tariffs not yet cost-reflective, technical deficiencies, ongoing outages, record losses and debt at end-FY18/19.

### Monetary policy and financial sector soundness
- SARB policy moves:
  - Hiked policy rate by 25 basis points to 6.75 percent in November 2018.
  - Unwound earlier hike in July 2019 and kept the rate at 6.5 percent in September and November 2019.
- Headline inflation (percent): 2016: 6.3; 2017: 5.3; 2018: 4.6; 2019: 4.2; 2020: 5.2; 2021: 5.0; 2022: 4.9; 2023: 4.9.
- Real policy rate declined with economic activity; neutral rate appears in the range of 1¾–2¼ percent. SARB estimates neutral rate to rise from 2.2 percent in 2019 to 2.4 percent in 2021.
- Banking system resilience:
  - Banks fully compliant with Basel III solvency and liquidity requirements.
  - Nonperforming loans (NPLs) rose to 3.8 percent of gross loans.
  - Banking system assets exceed 100 percent of GDP; non-bank financial institutions’ assets amount to more than 200 percent of GDP.
  - Bank holdings: Eskom bonds 2–3 percent of total assets; government bonds slightly above 10 percent of total assets; about 50 percent of government bond holdings corresponds to short-term treasury bills.

### Baseline macro projections (selected figures preserved exactly)
- Real GDP growth (percent): 2016: 0.4; 2017: 1.4; 2018: 0.8; 2019: 0.4; 2020: 0.8; 2021: 1.0; 2022: 1.3; 2023: 1.5.
- Per-Capita Real GDP growth (percent): 2016: -1.1; 2017: -0.1; 2018: -0.7; 2019: -1.1; 2020: -0.7; 2021: -0.5; 2022: -0.2; 2023: 0.0.
- Current account balance (percent of GDP): 2016: -2.9; 2017: -2.5; 2018: -3.5; 2019: -3.3; 2020: -3.7; 2021: -3.7; 2022: -3.7; 2023: -3.9.
- Overall balance (percent of GDP): 2016: -4.1; 2017: -4.4; 2018: -4.3; 2019: -6.1; 2020: -6.7; 2021: -6.8; 2022: -6.8; 2023: -6.8.
- Primary balance (percent of GDP): 2016: -0.6; 2017: -0.8; 2018: -0.5; 2019: -2.1; 2020: -2.4; 2021: -2.2; 2022: -1.8; 2023: -1.5.
- Gross debt (percent of GDP): 2016: 51.5; 2017: 53.0; 2018: 56.7; 2019: 60.8; 2020: 65.3; 2021: 69.6; 2022: 73.5; 2023: 77.1.

### Downside risks, scenarios, and stress tests
- Major domestic downside risks: failure to address Eskom, policy missteps, governance setbacks → reduced market confidence, higher debt possibly beyond 90 percent of GDP in the next few years, elevated financing costs, discouraged private investment, larger capital outflows, rand depreciation, higher inflation, protracted low growth harming bank asset quality and liquidity.
- Major external downside risks: rising protectionism, weaker growth in advanced markets and China, tightening global liquidity that sharply reduces non-FDI net inflows.
- Scenario outcomes (staff upside and downside examples preserved exactly as in source):
  - Upside scenario (calendar-year projections starting 2019 baseline):
    - Real GDP growth (percent): 2019 0.4; 2020 1.4; 2021 2.2; 2022 3.0; 2023 3.7
    - Public debt (percent of GDP): 2019 60.6; 2020 63.6; 2021 64.4; 2022 63.5; 2023 60.9
    - Fiscal Deficit (percent of GDP): 2019 -6.0; 2020 -6.0; 2021 -4.6; 2022 -3.2; 2023 -1.6
  - Persistent low growth scenario: if growth permanently lower by 1 percentage point during 2020–24, debt-to-GDP would reach about 96 percent in 2024.
  - Combined macro-fiscal shocks could push debt-to-GDP to more than 90 percent by 2024 and increase GFNs by about 3.5 percentage points of GDP by 2024.
  - Contingent liability shock (call on remaining SOE guarantees) would raise public debt to 96 percent of GDP by 2024.
- Fan-chart and stress-test findings: under downside shocks debt-to-GDP reaches 90 percent of GDP by 2024 (upper end of 75th–90th percentile fan chart); indicative thresholds: 70 percent of GDP for debt and 15 percent of GDP for gross financing needs.

### Policy recommendations — consolidation and composition
- Debt anchor and medium-term stabilization:
  - Establish a credible public debt anchor to complement the nominal expenditure ceiling and guide reversal in the debt trajectory.
- Required consolidation:
  - Stabilizing government debt at the current level after unavoidable support to SOEs requires reducing the fiscal deficit by 4–4½ percent of GDP over the next four years.
  - Evenly-spread measures of about 3–3½ percent of GDP plus additional 1–1½ percent of GDP from improved tax buoyancy, reduced safety net benefit payments, and lower interest payments.
- Expenditure-based, growth-friendly measures:
  - Address high compensation costs via natural attrition and below-inflation wage increases to achieve savings of about 2 percent of GDP over four years.
  - If SOEs cut costs, reduce government transfers by ½–1 percent of GDP, mainly in outer years.
  - Improve expenditure efficiency via periodic spending reviews (education, health, infrastructure) and limit tertiary education subsidies to poor households to save ½ percent of GDP.
  - Safeguard well-targeted social spending.
- SOE-specific measures:
  - Make SOEs lean, efficient, and competitive; accelerate restructuring, closure or divestiture where warranted; harden budget constraints and increase private sector participation.
  - For Eskom, link additional borrowing to productive investments and subject transfers to measures that reduce primary energy costs, enhance service delivery, collect arrears, and rationalize the wage bill.
  - Avoid financial restructuring that undermines reform incentives (e.g., transfers of Eskom debt to special purpose vehicles).
- Revenue-side measures:
  - Strengthen SARS administration capacity; make use of revamped large taxpayers’ unit; review legislation to limit base erosion and profit shifting; reduce tax expenditures; gradually increase the carbon tax introduced this year.
- Monetary and financial policy coordination:
  - Monetary policy should continue to pursue low and stable medium-term inflation; SARB independence and inflation mandate should be preserved.
  - Maintain rand flexibility as a shock absorber; sequence further liberalization of exchange controls to facilitate adherence to OECD Codes of Liberalization.
  - Monitor unsecured lending and vulnerabilities in small and medium-sized banks; bolster early warning systems, crisis management, stress-testing, and the resolution regime, including deposit insurance.

### Structural reforms and governance priorities
- Priority reforms: energy (including Eskom unbundling), transport, telecommunications, mining, product market competition, and labor market flexibility.
- Key actions recommended:
  - Establish fair and clear investment rules to spur private investment.
  - Restructure, liquidate, or divest SOEs based on commercial viability with transparent pricing mechanisms.
  - Increase competition in ports and railways; share infrastructure with private sector.
  - Encourage renewables and private participation in electricity generation.
  - Streamline regulatory constraints, clarify land reform, decentralize wage bargaining, and improve education to address skills mismatches.
- Governance and anti-corruption:
  - Accelerate reforms to strengthen governance of tax administration and SOEs.
  - Enhance autonomy of anti-corruption agencies, expedite prosecutions, and improve AML/CFT tools.
  - Rebuild capacity in SARS and the NPA; ongoing forensic investigations and asset recovery (NPA recovered more than R2.8 billion in the past financial year).

### Mitigating factors and resilience
- Mitigating factors:
  - Sound economic policymaking institutions (SARB and National Treasury).
  - Flexible exchange rate as shock absorber.
  - Large and well-capitalized banks; public debt composition with average maturity about 13 years; short-term debt about 10 percent of total; government FX debt 10 percent.
  - Open and liquid capital markets and large domestic institutional investor base.
- Remaining vulnerabilities:
  - Depleted fiscal buffers, heavy reliance on volatile non-FDI inflows to finance GEFNs, weak SOEs, high contingent liabilities, and elevated bond spreads (above 300 bps).

*International Monetary Fund staff report: South Africa — 2019 Article IV consultation (excerpts, content unit 1zafea2020001).*

### 2019. Mr. Montfort Mlachila (senior resident representative) assisted

### PERSISTENTLY WEAK GROWTH AMID A COMPLEX BACKDROP

### Economic performance and trends
- Annual output growth averaged about 4 percent in the early and mid-2000s, then fell to slightly above 1 percent as private investment’s contribution to growth declined and total factor productivity (TFP) growth became negative.
- Fiscal deficits remained around 4½ percent of GDP after countercyclical easing during the global financial crisis, more than doubling public debt to close to 60 percent of GDP.
- External current account deficit widened to 3½ percent of GDP with increasing interest payments to nonresident investors.
- Average inflation has remained above 5 percent, with volatility declining as the inflation targeting framework gained credibility.
- Annual growth reached 0.2 percent in January-September 2019; per-capita GDP growth set to contract for the fifth year in 2019.

### Structural constraints and labor, poverty, and inequality
- Structural rigidities and governance weaknesses have left growth on a declining trend, preventing South Africa from benefitting from the global recovery.
- Private investment and exports depressed by policy uncertainty and rigid labor and product markets; fiscal spending has focused on current outlays with a low growth multiplier.
- South Africa’s Gini coefficient is above 0.6.
- Unemployment is 29 percent; youth unemployment is about double the overall rate.
- Vulnerable groups: children, the elderly, and Black Africans, especially women.
- Social grants have a progressive impact but are not substitutes for private-sector led job creation.

### Policy environment, debate, and reform agenda
- Authorities seek a policy mix to boost growth; a recent discussion paper recommends reforms to modernize network industries, lower barriers to entry, promote agriculture, improve export competitiveness, and implement flexible industrial and trade policies.
- Proposed measures by some senior politicians that could be counterproductive if implemented include:
  - land expropriation without compensation;
  - establishment of a largely unfunded universal medical insurance scheme;
  - extension of tax incentives to selected industries;
  - nationalization of the South African Reserve Bank (SARB) or changes to its mandate;
  - "quantitative easing" and "prescribed assets" by financial institutions to absorb public debt.
- Prescribed assets are defined as investments legally forced by government regulations.

### Unfavorable macro-financial spillovers of the fragile economy
- Portfolio flows and asset prices:
  - Nonresident investors have been net sellers of portfolio assets (mainly equity), bucking trends in other EMs.
  - The rand and government yields have traded weaker than “fair values.”
  - Eskom’s local bond yields have traded significantly above the sovereign’s.
  - Moody’s and S&P downgraded the outlook to negative; a downgrade by Moody’s below investment grade could remove South Africa from a large global bond index and trigger forced selling.
- Investor composition shifted toward more volatile absolute return-seeking funds (hedge funds and ETFs).
- Sovereign placed $5 billion in Eurobonds in September 2019, raising $1 billion more than initially planned; the auction was oversubscribed (2.7x).
- Domestic lending and bank soundness:
  - Private sector credit edged up moderately, partly due to unsecured lending to individuals.
  - Lending growth by small and medium-sized banks turned negative in Q1 2019, then recovered.
  - Household debt started to edge up relative to disposable income after several years of decline.
  - Bank holdings of Eskom bonds are relatively small, at 2–3 percent of total assets.
  - Bank holdings of government bonds increased to slightly above 10 percent of total assets.
  - About 50 percent of bank holdings of government bonds corresponds to short-term treasury bills.
  - Bank asset quality worsened gradually beyond the initial impact of IFRS9 introduction.
- External flows and reserves:
  - Current account deficit in 2018 was financed by cross-border bank lending and repatriation by residents as portfolio inflows weakened.
  - Gross external financing needs were 18 percent of GDP.
  - Exports did not benefit much from a weaker rand due to structural rigidities.
  - Staff estimates indicate the external position remains moderately weaker than implied by fundamentals and desirable policies (moderate overvaluation).
  - Official reserves are at 70 percent of the unadjusted reserve adequacy (ARA) metric and 77 percent of the ARA metric adjusted for capital flow management measures.
- Regional spillovers:
  - South Africa is an important source of FDI and remittances for regional economies and an export destination.
  - Custom transfers to SACU economies are highly volatile and past declines have created fiscal pressures in recipient countries.
  - Monetary and exchange rate developments affect economies with currency pegs to the rand.
  - South African banks' lending to sub-Saharan Africa has remained relatively stable.

### Recent fiscal developments and the role of SOEs
- Staff projects the government deficit to reach 6½ percent of GDP in FY19/20 (2 percentage points of GDP higher than in FY18/19).
  - About one half of the increase is projected to be driven by transfers to SOEs; the remainder mainly by other transfers, compensation, and interest costs.
- Domestic borrowing is expected to finance most of the deficit.
- Structural primary deficit is set to reverse the slightly declining trend of recent years (see Box 1: The Fiscal Stance).
- Tax revenue relative to output is one of the largest in EMs; the wage bill-to-GDP ratio is among the highest.
- Budget composition:
  - Tilt toward current spending has reduced the government's ability to support infrastructure and other priorities.
  - Public investment declined; transfers to local governments for investment projects underutilized; effectiveness of health and education outlays deteriorated.
  - Transfers to SOEs and tax expenditures/subsidies have added pressure on the budget.
- SOE performance and fiscal costs:
  - SOEs face elevated costs from bloated wage bills and costly procurement; cost increases have outstripped tariff increases and cuts in capital expenditure.
  - Eskom’s debt is around 10 percent of GDP; operational balance is insufficient to service its high debt.
  - Government committed to support Eskom with exceptional financing equivalent to 4¾ percent of GDP over 10 years (2⅓ percent over the next 3 years).
  - Eskom faced a liquidity crisis in March 2019 prompting a bridge bank loan and urgent budget support.
  - SAA was placed in insolvency protection in December after an additional bailout.
  - PRASA was put under administration after continued poor operational and financial performance.
- Medium-term fiscal trajectory:
  - The October Medium-Term Budget Policy Statement (MTBPS) confirmed vulnerable fiscal and debt situations—weak tax revenue, rigid spending, and persistent SOE difficulties—projecting government debt that increases significantly and does not stabilize.

*International Monetary Fund staff report: South Africa — 2019 Article IV consultation (excerpts).*

### 1.2 percent GDP, on average, than the same measures for the consolidated government. This is because

### 1zafea2020001 - 1.2 percent GDP, on average, than the same measures for the consolidated government. This is because

### Fiscal and non-financial public entity performance
- Non-financial public entities were running overall and primary cash deficits and debt accumulation, with deficits also deteriorating sharply since FY08/09.
- The direct cost of Eskom to the budget exceeded 9 percent of GDP cumulatively between FY08/09 and FY18/19, reflecting a combination of direct transfers (6 percent of GDP) and debt service costs.
- Staff projections (baseline) foresee high fiscal deficits in the medium term of 6½ to 7 percent of GDP if limited adjustment and SOE bailouts continue.
- Government debt is projected to rise to 77 percent of GDP by 2023 under staff projections.
- Both debt and gross financing needs are projected to rise beyond the Debt Sustainability Analysis (DSA) risk thresholds in 2022 and 2020, respectively.

### Eskom: what went wrong and macro-criticality
- Eskom provides 90 percent of domestic electricity consumption and exports energy to regional neighbors.
- Eskom assets estimated at 16 percent of GDP.
- Eskom’s debt represents almost 10 percent of GDP, of which 80 percent is guaranteed by the government.
- Average age of Eskom’s fleet is 37 years.
- Key sources of financial troubles:
  - Major governance and technical weaknesses: corruption, delays in debt-financed investments, expensive procurement, cost-overruns, reliance on outdated plants and increased recourse to expensive fuel generation, low cashflow, and delayed maintenance.
  - Declining electricity demand: low growth and frequent cuts in supply, grid-defection, competition from cheaper renewable power producers.
  - Unsustainable revenue sources: tariff increases of 50 percent in real terms since 2005 have not covered all costs; failure to collect outstanding electricity bills from municipalities and townships.
  - Rising input, employment and interest costs: purchased coal and other inputs significantly above world prices; workforce increased by 50 percent since mid-2000s; wages up 50 percent in real terms since mid-2000s; rising debt and financing costs.
- Actions taken: government replaced the board and management; appointed a chief restructuring officer; published a roadmap and resource plan for changes in Eskom’s business model and the electricity sector. Remaining challenges include elevated coal costs, tariffs not yet cost-reflective, technical deficiencies forcing reliance on expensive turbines, ongoing disruptive power outages, and record losses and debt levels at end-FY18/19.
- Footnote detail: Eskom is contesting in court the regulator’s decision to consider government transfers as operational revenue and is asking for reimbursement of “prudently incurred” expenditures denied by the regulator.

### Reforms and implementation status
- Initial reform steps taken:
  - Rebuilt tax administration capacity, including reinstating the large taxpayers’ unit within SARS.
  - Streamlined regulation for mining exploration.
  - Eased visa restrictions for tourists.
  - Initiated the allocation of broadband spectrum.
  - Expedited company registration.
  - Asked private power producers to provide options to help ease electricity shortages.
- Text Table 1: Main reform priorities (implemented and to be implemented) include actions on visa, spectrum allocation, mining, financial inclusion (issued permits to three digital banks), red tape (enabled registration of business in one day), competition, and network industries (published Eskom Roadmap and Integrated Resource Plan). To be implemented items include facilitating work permits for high-skilled professionals; allowing competitive use of spectrum to private sector participants; addressing industry concerns on domestic procurement and ownership to unlock private investment; continue leveraging fintech; creating one-stop-portal for remaining investment procedures; removing regulations that allow market dominance and rigidities in the labor market; stabilizing Eskom financial situation, reviewing regulatory tariffs, and allowing private sector participation.

### Monetary policy stance
- The SARB hiked the policy rate by 25 basis points to 6.75 percent in November 2018.
- In July 2019 the SARB unwound the earlier hike and kept the rate at 6.5 percent in September and November.
- Headline inflation remains above that of trading partners; medium-term inflation expectations remain above 5 percent.
- The real policy rate declined with economic activity but is relatively low against other benchmarks; the neutral rate appears in the range of 1¾–2¼ percent.
- SARB estimates the neutral rate to rise from 2.2 percent in 2019 to 2.4 percent in 2021.

### Financial sector resilience and vulnerabilities
- Banks are fully compliant with Basel III solvency and liquidity requirements.
- Nonperforming loans (NPLs) have risen to 3.8 percent of gross loans.
- Unsecured lending picked up in banks looking to boost profit.
- Banks are required to provide debt relief for low-income borrowers.
- Resolution framework is being buttressed; authorities sought assistance from international bodies (Financial Stability Board peer review, Financial Action Task Force assessment, IMF Financial Sector Assessment Program).
- Discussion ongoing with the OECD regarding the Codes of Liberalization of the capital account.
- Banking system assets exceed 100 percent of GDP; non-bank financial institutions’ assets amount to more than 200 percent of GDP.

### Baseline outlook and macro projections (selected figures preserved exactly as in source)
- Real GDP growth (percent): 2016: 0.4; 2017: 1.4; 2018: 0.8; 2019: 0.4; 2020: 0.8; 2021: 1.0; 2022: 1.3; 2023: 1.5.
- Per-Capita Real GDP growth (percent): 2016: -1.1; 2017: -0.1; 2018: -0.7; 2019: -1.1; 2020: -0.7; 2021: -0.5; 2022: -0.2; 2023: 0.0.
- Headline inflation (percent): 2016: 6.3; 2017: 5.3; 2018: 4.6; 2019: 4.2; 2020: 5.2; 2021: 5.0; 2022: 4.9; 2023: 4.9.
- Private sector credit growth (percent): 2016: 4.7; 2017: 4.3; 2018: 5.5; 2019: 3.1; 2020: 3.7; 2021: 3.7; 2022: 4.2; 2023: 4.8.
- Output gap (percent of potential real GDP): 2016: -0.6; 2017: -0.2; 2018: -0.3; 2019: -0.5; 2020: -0.4; 2021: -0.3; 2022: -0.2; 2023: 0.0.
- Gross national saving: 2016: 16.3; 2017: 16.3; 2018: 14.4; 2019: 14.2; 2020: 13.8; 2021: 13.8; 2022: 13.8; 2023: 13.8.
- Investment (Includes inventories): 2016: 19.2; 2017: 18.8; 2018: 17.9; 2019: 17.6; 2020: 17.5; 2021: 17.5; 2022: 17.5; 2023: 17.6.
- Current account balance (percent of GDP): 2016: -2.9; 2017: -2.5; 2018: -3.5; 2019: -3.3; 2020: -3.7; 2021: -3.7; 2022: -3.7; 2023: -3.9.
- Overall balance (percent of GDP): 2016: -4.1; 2017: -4.4; 2018: -4.3; 2019: -6.1; 2020: -6.7; 2021: -6.8; 2022: -6.8; 2023: -6.8.
- Primary balance (percent of GDP): 2016: -0.6; 2017: -0.8; 2018: -0.5; 2019: -2.1; 2020: -2.4; 2021: -2.2; 2022: -1.8; 2023: -1.5.
- Gross debt (percent of GDP): 2016: 51.5; 2017: 53.0; 2018: 56.7; 2019: 60.8; 2020: 65.3; 2021: 69.6; 2022: 73.5; 2023: 77.1.

### Downside risks and scenario analysis
- Major domestic downside risks: failure to address Eskom’s weaknesses, policy missteps, governance setbacks → reduced market confidence, higher debt possibly beyond 90 percent of GDP in the next few years, elevated financing costs, discouraged private investment, larger and longer capital outflows, rand depreciation and higher inflation, protracted low growth harming bank asset quality and liquidity, worsening poverty and unemployment.
- Major external downside risks: rising protectionism and retreat from multilateralism, weaker growth in advanced markets and China → worse twin deficits and commodity prices; a tightening of global liquidity conditions could sharply reduce non-FDI net inflows (the main source of current account financing).
- Scenario analysis starting from 2020 shows under a downside scenario: Real GDP growth (percent) path and fiscal outcomes that deteriorate markedly (calendar-year fiscal data differ slightly from baseline values).

### Vulnerabilities and mitigating factors (Text Table 2)
- Vulnerabilities:
  - Protracted low growth worsens social outcomes (growth averaged about 1.5 percent over the past decade).
  - Weakening SOEs pose risks to fiscus and growth (main risk: Eskom).
  - Depleted fiscal buffers reduce resilience to shocks.
  - Gross external financing needs (GEFN) are financed by more volatile non-FDI inflows.
  - Protracted decision-making processes for policies and reforms can hinder timely implementation.
- Mitigating factors:
  - Economic policymaking institutions are sound (SARB and National Treasury).
  - Flexible exchange rate is an important shock absorber.
  - Large and well-capitalized banks show resilience.
  - Public debt composition reduces rollover risks: average maturity about 13 years; short-term debt about 10 percent of total; share of government FX debt 10 percent.
  - Open and liquid capital markets attract investors; nonresident investors face no restriction to invest/divest in capital markets.
  - Non-banks and corporates are large and resilient (non-bank assets >200 percent of GDP).

### Policy discussions and recommendations
- Consolidation of government and SOE positions is critical to improving fiscal and monetary policy effectiveness.
- Staff urged the authorities to use the February FY20/21 budget to articulate growth-friendly consolidation measures.
- Staff projections incorporate savings from rationalization of spending in goods and services and some action on the wage bill, but also assume higher medium-term transfers to Eskom during unbundling.
- Staff emphasized that failure to timely address fiscal deterioration would lead to higher financing costs and a more abrupt future adjustment, magnifying adverse impacts on growth and social indicators.

*Source: IMF staff report excerpt (PDF content provided).*

### 22.      Importantly, staff urged the authorities to target medium-term debt stabilization by

### 1zafea2020001 - 22.      Importantly, staff urged the authorities to target medium-term debt stabilization by

### Debt anchor and medium-term stabilization
- Staff recommended establishing a credible public debt anchor for the fiscal framework given challenges with the current nominal expenditure ceiling and to guide a reversal in the debt trajectory in the medium term.
- A debt anchor would help minimize increases in debt during the projection period to gradually converge to the levels of the EMs that sustain investment grade ratings.

### Required fiscal consolidation and composition
- Stabilizing government debt at the current level after unavoidable support to SOEs requires reducing the fiscal deficit by 4–4½ percent of GDP over the next four years.
- Assuming growth-enhancing structural reforms support the envisaged fiscal adjustment:
  - Evenly-spread measures of about 3–3½ percent of GDP would be needed to make the consolidation gradual.
  - The remaining adjustment of 1–1½ percent of GDP would be achieved through:
    - improved tax buoyancy as growth picks up;
    - reduced safety net benefit payments as job creation curtails eligible beneficiaries;
    - lower interest payments in response to reduced borrowing needs and costs.
- Well-targeted social spending must be safeguarded to protect the poor.

### Expenditure-based, growth-friendly consolidation measures
- Rationale for expenditure-based adjustment:
  - Key role of expenditure in deficit increases;
  - Relatively robust tax-to-GDP ratio;
  - Uncertain yields of tax measures in a weak economy;
  - Recent consolidation efforts have been largely revenue-based.
- Specific expenditure actions recommended:
  - Address high compensation costs through a combination of natural attrition and below-inflation wage increases to achieve savings of about 2 percent of GDP over a four-year period.
  - If Eskom and other SOEs swiftly address inefficiencies and cut costs, government transfers could be reduced by ½–1 percent of GDP, mainly in the outer years of the projection period.
  - Improve expenditure efficiency by institutionalizing periodic spending reviews (education, health, infrastructure) and limit tertiary education subsidies to only poor households to help save the remaining ½ percent of GDP.
  - Any additional spending initiatives should be made budget neutral.

### Public debt risks and outlook (Box 3)
- Debt-to-GDP ratio has doubled in a decade and stands well above the EM average (the 6th in a sample of 20 EMs).
- Under staff’s baseline projections, the debt-to-GDP ratio is expected to continue to rise; the envisaged fiscal path would drive debt to above 80 percent of GDP by FY24/25 and keep rising.
- Real cost of borrowing is about 4 percent and has been on an upward trend, more than doubling since 2009.
- In a sample of 16 countries, only three EMs are paying higher real rates than South Africa on their 10-year domestic currency bonds.
- 5-year CDS spreads have converged to levels of economies that do not enjoy investment grade sovereign ratings.
- Debt accumulation has largely financed current expenditure (wage and interest bill increases) rather than productive capital expenditure; efficiency of health and education expenditure is low relative to outcomes.

### Tax administration and tax policy recommendations
- Strengthen SARS’s administration capacity to boost revenue collection; quantify gains is difficult at this stage.
- Make good use of the recently revamped large taxpayers’ unit to improve revenue buoyancy and collection of tax arrears.
- On tax policy, review legislation to limit base erosion and profit shifting opportunities, reduce tax expenditures (including those related to special economic zones), and gradually increase the carbon tax introduced this year.

### SOE reforms and fiscal protection
- Call for making SOEs lean, efficient, and competitive, especially in network industries (electricity and transport).
- Accelerate reforms and restructuring, including closure or divestiture where warranted; harden budget constraints and increase private sector participation.
- For Eskom, link any additional borrowing to productive investments and subject further budget transfers to measures that:
  - reduce primary energy costs through improved procurement of coal and cost-efficient electricity generation;
  - enhance service delivery to help improve demand;
  - collect arrears;
  - rationalize the wage bill.
- Avoid financial restructuring that leaves main vulnerabilities unaddressed (e.g., transfers of Eskom debt to special purpose vehicles that undermine reform incentives).
- Leverage private sector financing capacity and technical expertise to deliver reliable and cost-competitive electricity, reducing pressure on Eskom’s capacity and balance sheet.

### Authorities’ views on fiscal and SOE issues
- Authorities are working to attain consensus for needed fiscal consolidation and plan to target a primary balance excluding support to SOEs by 2022/23.
- Proposed measures were set out in the MTBPS and negotiations are underway to roll them out.
- To partially compensate for support to Eskom and other SOEs, authorities plan cuts in transfers to local governments and spending on goods and services, and are working on alternative measures to achieve broad-based wage bill savings.
- Budgeted fiscal transfers to Eskom are expected to help the company meet its debt obligations in the coming two years while authorities use the time to agree on governance, skill needs, and operational/financial improvements.
- Measures to reduce Eskom’s high debt burden will be pursued once significant improvements are achieved in financial and operational performance.
- Initial steps have been taken in SAA and PRASA to halt continued bailouts.

### Monetary policy, inflation, and financial sector soundness
- Monetary policy’s role in reigniting growth is limited by structural growth impediments but its impact on inflation remains relatively strong.
- Staff analysis: negative impact of moderate hikes in the repo rate on economic activity has declined as private investment is constrained by structural factors; disinflationary impact through expectations and signaling channels remains at work.
- To keep pursuing low and stable medium-term inflation, monetary policy could remain accommodative but should cautiously monitor upside and downside risks.
  - Upside risks: reversals of supply-related disinflationary factors (unfavorable weather for agriculture, domestic electricity prices, global oil prices).
  - Downside risks: protracted subdued growth.
- Impact of loose fiscal stance on inflation should be closely monitored; further monetary action may be required in the event of shocks.
- Close fiscal/monetary coordination is needed in the uncertain environment.
- External sector policies should remain consistent with inflation targeting; maintain rand flexibility as a shock absorber and, once reforms boost exports and capital inflows, seek opportunities to accumulate international reserves.
- Plans to further liberalize exchange controls to capital flows should be adequately sequenced and facilitate adherence to the OECD Codes of Liberalization over time.
- Financial stability: monitor increase in unsecured lending and vulnerabilities in small and medium-sized banks; bolster early warning system and crisis management framework; complement stress-testing with assessments of domestic and cross-border interconnectedness and enhance the resolution regime, including the deposit insurance scheme.
- Authorities’ monetary and financial sector views:
  - Project neutral interest rate to creep up, with the risk premium stemming mainly from fiscal challenges.
  - SARB’s headline inflation projection is 4.5 percent by the end of 2021 (somewhat lower than staff’s projection).
  - Promulgation of the bank resolution bill is expected in 2020.
  - Evidence that entry of new banks and digitalization have started to reduce fees.

### Structural reforms and competition in product markets
- Comprehensive action needed to address structural impediments by reversing deterioration in TFP; closing the gap to the EM frontier in product markets would deliver the highest growth gain.
- Priority reforms in energy, transport, telecommunications, and mining by establishing fair and clear investment rules to spur private investment.
- Improve governance and reduce confidence-sapping policy announcements to support an investment-friendly environment.
- Concentration in product markets and distortive regulations constrain growth and have adverse distributional effects; SMEs have shrunk relative to large firms.
- Rising input costs and markups are associated with declining economic growth; large SOEs pass on high costs to businesses, sustaining elevated price levels and reducing competitiveness.
- Staff recommendations to encourage entrepreneurship and reduce cost of doing business:
  - Restructure, liquidate, or divest SOEs based on commercial viability with transparent pricing mechanisms.
  - On energy, leverage Eskom unbundling to use cleaner energy and private sector participation.
  - On transport, increase competition in port and railway sectors, including sharing infrastructure with private sector to reduce logistics costs and boost exports.
  - Airline industry should stop depending on budget support and be run on a strictly commercial basis.
  - Streamline regulatory constraints inhibiting private investment, ensure clarity on land reform (critical for labor-intensive sectors such as agriculture).
  - Shift industrial policy from subsidies and tax breaks to facilitating favorable business conditions to attract competitive firms.

*Source: IMF staff report text (content unit 1zafea2020001, extracted section).*

### 37.      Pointing to ongoing reforms, the authorities concurred with staff on the need to boost

### 1zafea2020001 - 37.      Pointing to ongoing reforms, the authorities concurred with staff on the need to boost

### Reform agenda and competition
- Authorities and staff concurred on the need to boost competition to reduce prices and encourage investment opportunities and job creation.
- Reform priorities reiterated by the authorities:
  - Improve the cost-effectiveness of network industries.
  - Create conditions for growth in labor intensive sectors such as agriculture and tourism.
  - Increase trade efficiency to tap regional markets.
- Authorities acknowledged these reforms "will take time to implement" but emphasized they "will boost the economy's competitiveness."
- Business environment initiatives highlighted:
  - Recent initiatives to accelerate overdue reforms on visas and spectrum allocation.
  - Efforts to eliminate red tape and revamp the competition law to reduce the market power of large players and allow for a greater role for SMEs.
- Authorities recognized an "inherent efficiency-equity trade-off" from regulatory requirements aimed at broadening citizens’ participation and supporting localization.

### State-owned enterprises (SOEs) and energy sector strategy
- Authorities noted the SOE reform process is complex and will take time.
- Reversing persistent state capture damage is critical for stabilizing SOE governance and financial performance.
- On Eskom:
  - Confidence that the recently issued Roadmap and Integrated Resource Plan would facilitate its unbundling.
  - Objective: attract increased private investment in electricity generation and optimize use of the transmission grid.
  - Strategy to pursue a greater role of renewables as South Africa advances in its international climate change commitments.

### Land reform: main factors involved
- Importance:
  - Black Africans hold less than 10 percent of agricultural land and about 30 percent of urban land owned by individuals (Land Audit Report, 2017).
  - A policy of "land expropriation without compensation (LEWC)" has been proposed, raising property rights issues.
- Past experience:
  - Only one-third of the targeted land transfers has been achieved despite several initiatives and provision of titles.
  - Redistribution hurt by weak governance and inefficiencies in land recognition, records, and registers.
- Current proposals:
  - Constitutional review committee recommended amending section 25 of the Constitution.
  - Presidential Advisory Panel (PAP) appointed in September 2018; report delivered in May 2019.
  - PAP recommended no compensation in expropriations related to unused, under-utilized, SOE-owned, abandoned, highly-indebted land or land obtained criminally or held for speculation.
  - No compensation would also apply to informal settlements, inner-city buildings with absentee landlords and farm equity schemes.
  - PAP recommended improving overall governance of the redistribution program.
  - Private sector proposals include voluntary land donations from churches, mining and other companies, and farmers.

### Labor market dynamics and reforms
- Key factors worsening unemployment:
  - Low growth, a rising labor force, and persistent structural rigidities.
  - Growth tilted toward sophisticated sectors (finance, information technology, and specialized business services) benefiting high-skilled workers over low-skilled, labor-intensive industries (agriculture, tourism, manufacturing).
  - Labor cost increases exceed productivity improvements due to centralized wage bargaining transmitting wage increases economy-wide.
  - Firm closures further worsen labor market dynamics.
- Regulatory constraints and rigidities:
  - Inhibit firms’ ability to hire on a need basis, limiting opportunities for inexperienced workers and youth.
  - Firms prefer skilled and experienced workers to justify centrally bargained wages.
  - High reservation wages due to spatial inequalities and high transportation costs to urban job centers.
  - Anecdotal evidence that social grants can in some cases increase reservation wages.
  - Concerns expressed regarding the impact of the national minimum wage in some sectors.
- Recommendations to promote flexibility and human capital:
  - Reforms to improve product market and public spending efficiency to enhance infrastructure and transport and alleviate participation constraints.
  - Boost quality of education to address skills mismatches.
  - Decentralize wage bargaining and relax workforce management restrictions to align hiring with business needs.
  - Allow firms the option to hire young and less experienced workers and better differentiate compensation between skilled and unskilled labor.
- Authorities’ views on labor:
  - Promote private sector-led growth, with a focus on labor intensive sectors (agriculture and tourism).
  - Long-term policies to overcome educational challenges and integrate youth via training and apprenticeships.
  - Initiatives to reduce participation costs by setting up sustainable cities and inclusive transport systems.
  - Noted difficulties addressing constraints imposed by centralized bargaining given strong union opposition.

### Governance, anti-corruption, and institutional capacity
- Governance weaknesses and policy uncertainty have debilitated key economic institutions, with state capture damaging SARS and many SOEs.
- Fiscal outcomes affected through lower revenue and procurement weaknesses; failure of one small mutual bank reflected governance deficiencies.
- Staff recommendations to reduce vulnerabilities to corruption:
  - Accelerate reforms to strengthen governance of tax administration and SOEs (¶ 25–¶ 26) and ease regulatory constraints (¶35).
  - Enhance autonomy of anti-corruption agencies to strengthen effectiveness and accountability and bolster coordination within government.
  - Expedite criminal prosecution against those engaged in corrupt activities.
  - Use the ongoing AML/CFT framework assessment to improve AML tools for combating corruption, including with respect to politically exposed persons, beneficial ownership, and the criminal justice system.
- Authorities’ views on governance:
  - Strong efforts underway to reverse capacity decline from state capture; results are slow but measures are in place to prevent corruption and improve governance.
  - Prosecution authority being capacitated technically and financially.
  - Collaboration with other jurisdictions to recover illegal outflows, including freezing bank accounts during investigations.

### Capacity development (CD)
- Scope to continue robust CD engagement; South Africa’s technical capacity is high.
- Recent IMF CD support included financial and fiscal stress testing, transfer pricing, management of capital flows, and enhancement of seasonal adjustment as part of rebasing national accounts.
- Future CD priorities: fiscal risk management, tax administration, financial stability and inclusion, and national accounts statistics (Annex IX).
- Authorities’ CD views:
  - SARS rebuilding capacity guided by a Tax Administration Diagnostic Assessment using TADAT.
  - SARB views the forthcoming FSAP as an opportunity to strengthen regulatory and supervisory framework.
  - STATS SA appreciated CD to improve seasonal adjustment and may request further CD.
  - National Treasury seeks assistance in setting overall risk limits on SOEs’ contingent liabilities, potentially assisted by IMF CD.

### Upside scenario: benefits of reform
- Staff scenario: comprehensive reform implementation would significantly boost growth while replenishing key buffers.
- Projected medium-term gains from a combination of structural reforms and fiscal consolidation: "2¼ percent of GDP." (footnote)
- Key scenario outcomes (calendar-year projections starting 2019 baseline; scenario analysis starts from 2020):
  - Real GDP growth (percent): 2019 0.4; 2020 1.4; 2021 2.2; 2022 3.0; 2023 3.7
  - Per-Capita Real GDP growth (percent): 2019 -1.1; 2020 -0.1; 2021 0.7; 2022 1.5; 2023 2.1
  - Headline inflation (percent): 2019 4.2; 2020 5.3; 2021 5.4; 2022 4.7; 2023 4.4
  - Private sector credit growth (percent): 2019 3.1; 2020 4.6; 2021 6.3; 2022 8.4; 2023 10.5
  - Fiscal Deficit (percent of GDP): 2019 -6.0; 2020 -6.0; 2021 -4.6; 2022 -3.2; 2023 -1.6
  - Public debt (percent of GDP): 2019 60.6; 2020 63.6; 2021 64.4; 2022 63.5; 2023 60.9
  - Current account balance (percent of GDP): 2019 -3.3; 2020 -4.0; 2021 -4.7; 2022 -4.9; 2023 -4.8
- Mechanisms highlighted:
  - Improved business environment and lower input costs in network industries boost potential growth.
  - Higher growth reduces unemployment and poverty, increases bank lending, and creates virtuous macro-financial feedback loops.
  - Inflation and inflation expectations fall over the medium term as higher competition and exchange rate appreciation counterbalance robust domestic demand.
  - CA deficit initially widens as investment-related imports expand, then narrows as competitiveness and exports improve.

### Staff appraisal and policy recommendations
- Assessment of the situation:
  - Several years of persistently low growth have exacerbated high unemployment, poverty, and inequality.
  - The country is estimated to have had the fifth year of negative real per-capita growth in 2019 and, on current policies, is set to continue this trend.
  - Fiscal stimulus alone has been insufficient because supply-side constraints were not addressed.
  - Sluggish transformation of excessively regulated and rigid product and labor markets has hindered private investment and exports.
  - Large fiscal deficits led to rapid public debt accumulation, leaving no fiscal space and widening the external current account gap, mainly financed by non-FDI inflows.
  - High public debt constrains monetary policy; risks to growth are tilted to the downside if reforms do not take off or if financing conditions deteriorate.
- Urgent recommendations:
  - Expedite structural reform implementation to sustainably boost private investment and inclusion.
  - Improve cost-effectiveness of network industries; deliver an electricity sector providing reliable services at predictable and reasonable prices without government support.
  - Actively pursue financial and technical capacity of the private sector in renewables.
  - Subject dominant market players in poorly contested sectors to healthy competition.
  - Streamline regulatory requirements that unduly inflate production costs.
  - Tackle labor market rigidities to better align wages with productivity and facilitate employment, including in SMEs.
  - Complementary governance and public spending reforms:
    - Strengthen criminal justice institutions, restore integrity of key state entities, and empower tax collection and prosecution authorities.
    - Vigorously prosecute those involved in corrupt activities.
    - Enhance AML/CFT tools.
    - Make public education and health spending more efficient.
    - Gradually reduce inefficient subsidies and tax breaks.
  - Fiscal policy and consolidation:
    - Implement a gradual, decisive and growth-friendly consolidation accompanying structural reforms.
    - FY20/21 budget to be presented in February should articulate meaningful measures to strengthen fiscal and debt path.
    - Adjustment should be mainly expenditure based: contain increases in compensation costs and rationalize support to SOEs.
    - Condition SOE support on improved governance and meeting well-defined quantitative operational and financial performance targets.
    - Improve composition of spending to support infrastructure and well-targeted social outlays, reducing unproductive expenditure.
    - On revenue side, reforms to deter transfer pricing and profit shifting while strengthening tax administration are essential.
  - Fiscal framework enhancement:
    - Add a debt anchor to complement the nominal expenditure ceiling to guide debt stabilization at prudent levels.
    - Government should target a reversal in the debt trajectory to contain borrowing costs, enhance confidence, and attract investment.
- Warning:
  - On current policies, public debt would exceed 70 percent of GDP in the near term and would not stabilize.

*International Monetary Fund — South Africa, selected excerpts from the IMF country report.*

### 54.      Monetary policy should continue to focus on pursuing low and stable medium-term

### 1zafea2020001 - 54.      Monetary policy should continue to focus on pursuing low and stable medium-term

### Monetary policy: focus and credibility
- Monetary policy should continue to focus on pursuing low and stable medium-term inflation.
- Amid rising fiscal risks and volatile global conditions, the SARB should maintain its hard-won monetary policy credibility by continuing to monitor upside and downside risks to inflation with a view to durably anchor inflation expectations at the targeted level.
- Monetary policy has limited potency to boost growth in South Africa at this juncture when the main binding constraints are of a structural nature.
- The SARB independence and inflation mandate should be preserved.

### Financial sector resilience: status and priorities
- Financial sector resilience is an asset and should be maintained.
- The banking system is dominated by large banks with strong balance sheets, but pockets of vulnerability should be monitored, including:
  - those related to the recent pick-up in unsecured lending;
  - the operations of small and medium-sized banks; and
  - the strong bank interconnectedness with the broader financial system.
- Entry of new players and technological innovation to help reduce costs and improve access to financial services should continue to be encouraged.

*Source: 1zafea2020001*

### 56.      It is proposed that the next Article IV consultation with South Africa take place on the

### It is proposed that the next Article IV consultation with South Africa take place on the standard 12-month cycle.

### Growth, social indicators, and labor market
- South Africa’s per-capita growth "failed to rebound as much as in other emerging economies" and is "losing further ground relative to peers."
- Real GDP (annual percent change): 2014: 1.8; 2015: 1.2; 2016: 0.4; 2017: 1.4; 2018: 0.8; 2019: 0.4; 2020: 0.8; 2021: 1.0.
- Real GDP per capita (annual percent change): 2014: 0.3; 2015: -0.3; 2016: -1.1; 2017: -0.1; 2018: -0.7; 2019: -1.1; 2020: -0.7; 2021: -0.5.
- Unemployment rate (percent of labor force, annual average): 2014: 25.1; 2015: 25.4; 2016: 26.7; 2017: 27.5; 2018: 27.1; 2019: 28.6; 2020: 29.8; 2021: 30.7.
- Poverty and inequality indicators (selected): Lower national poverty line (2015) 36.8 percent of population; Undernourishment (2016) 6,354; Gini coefficient (2015) 63.

### Real sector developments and drivers
- Growth recently sustained by private consumption; investment and exports are a drag.
- Contributions to Real GDP Growth — supply sectors (percent) showed negative contributions from agriculture and mining in 2018.
- Private investment stagnated notably, "depressed by weak business confidence."

### Financial market developments and portfolio flows
- Uncertainty rose moderately before May 2019 elections but remained subdued thereafter.
- The rand has traded relatively weak; local-currency sovereign yields "failed to decline as much as implied by global yields likely on fiscal worries."
- Nonresident selling of local assets persisted, "bucking EM trend," with higher shares of ETF and mutual funds in nonresident government bond holdings.
- Net purchases of bonds by nonresidents (billions of U.S. dollars, Table 7): 2014: -5.1; 2015: -2.3; 2016: -2.4; 2017: 1.7; 2018: -6.7; 2019: -2.3.

### External sector and exposures
- Current account balance (billions of U.S. dollars): 2014: -17.8; 2015: -14.7; 2016: -8.5; 2017: -8.9; 2018: -13.1; 2019: -11.9; projections show widening deficits through 2024.
- Current account (percent of GDP): 2014: -5.1; 2015: -4.6; 2016: -2.9; 2017: -2.5; 2018: -3.5; 2019: -3.3.
- Gross reserves (end of period, billions of U.S. dollars): 2014: 49.1; 2015: 45.8; 2016: 47.4; 2017: 50.7; 2018: 51.6; 2019: 53.8.
- Total external debt (percent of GDP): 2014: 41.3; 2015: 39.1; 2016: 48.2; 2017: 49.6; 2018: 46.8; 2019: 51.1.

### Spillovers and regional linkages
- Most of South Africa’s major import origin countries are outside SSA.
- South Africa’s importance as export destination has declined for partners in SSA and outside.
- SACU transfers have stagnated.
- Large South African banks are present across the region at larger scales relative to host country GDP; operations in the region remained relatively stable.

### Fiscal developments and public finances
- Expenditure rose due to wages, interest payments, and transfers over the past decade.
- Tax revenue is higher than for peers as a share of GDP.
- Table 1 fiscal aggregates (percent of GDP): Revenue, including grants: 2014: 27.6; 2015: 28.2; 2016: 28.6; 2017: 28.3; 2018: 29.1; 2019: 29.1; 2020: 29.1; 2021: 29.1.
- Expenditure and net lending (percent of GDP): 2014: 31.9; 2015: 32.9; 2016: 32.7; 2017: 32.6; 2018: 33.4; 2019: 35.2; 2020: 35.9; 2021: 36.0.
- Overall balance (percent of GDP): 2014: -4.3; 2015: -4.8; 2016: -4.1; 2017: -4.4; 2018: -4.3; 2019: -6.1; 2020: -6.7; 2021: -6.8.
- Gross government debt (percent of GDP): 2014: 47.0; 2015: 49.3; 2016: 51.5; 2017: 53.0; 2018: 56.7; 2019: 60.8; 2020: 65.3; 2021: 69.6.

### Monetary policy, inflation, and credit conditions
- Inflation fell to around the midpoint of the target band aided by a favorable supply shock amid weak growth.
- CPI (annual average): 2014: 6.1; 2015: 4.6; 2016: 6.3; 2017: 5.3; 2018: 4.6; 2019: 4.2; projections: 2020: 5.2; 2021: 5.0.
- Repo rate (percent, end-period, Table 1): 2014: 5.8; 2015: 6.3; 2016: 7.0; 2017: 6.8; 2018: 6.8; 2019: 6.5.
- Analysts expect the policy rate to remain unchanged through end-2021.
- Real policy rate rose but remains below the 2000–07 norm amid a weaker economy.

### Credit market and financial soundness
- South Africa "appears to have been at the bottom of the financial cycle for nearly a decade."
- Credit standing of consumers appears weak; inquiries for debt collection remain elevated.
- Real credit growth edged up but remains weak.
- Financial soundness indicators (selected, percent): Regulatory capital to risk weighted assets: 2014: 14.8; 2015: 14.2; 2016: 15.9; 2017: 16.3; 2018: 16.1; 2019: 16.4.
- Nonperforming loans to total of loans (percent): 2014: 3.2; 2015: 3.1; 2016: 2.9; 2017: 2.8; 2018: 3.7; 2019: 3.8.
- Household debt to GDP (percent): 2014: 45.8; 2015: 45.1; 2016: 43.5; 2017: 42.3; 2018: 43.3; 2019: 43.3.

### Scenarios and key macroeconomic projections
- Scenario outcomes (Figure 9 summary):
  - Upside scenario: Real GDP growth would rise to 4 percent; inflation would rise on strong demand; unemployment would continue to fall; CA deficit would widen on strong demand; fiscal deficits would halve; public debt would peak and start to decline.
  - Downside scenario: Real GDP growth would fall to -2 percent; inflation would rise due to rand depreciation; unemployment would surge to 38 percent; CA would turn to a surplus on demand compression; fiscal deficits would nearly double; public debt would become high and explosive.
- IMF staff calculations underpin the scenarios.

### Structural issues and policy priorities
- Markups in South Africa "rose rapidly," likely reflecting concentrated market structure and contributing to elevated price levels.
- Better governance yields multiple benefits, including higher tax revenue.
- Demand-side priority: unlocking low entrepreneurial activity to boost job creation.
- Supply-side priority: improve education attainment and skills (PISA Score and Education Spending, 2015 referenced in source).

### Key balance of payments and medium-term framework highlights
- Exports of goods and services (volume, annual percent change): 2014: 3.6; 2015: 2.9; 2016: 0.4; 2017: -0.7; 2018: 2.6; 2019: 0.5; projections: 2020: 3.4; 2021: 3.2; 2022: 3.5; 2023: 3.5; 2024: 3.7.
- Imports of goods and services (volume, annual percent change): 2014: -0.6; 2015: 5.4; 2016: -3.9; 2017: 1.0; 2018: 3.3; 2019: 1.5; projections: 2020: 3.2; 2021: 3.2; 2022: 3.5; 2023: 3.6; 2024: 3.6.
- Medium-term projections: Overall balance near 0.0 percent of GDP in projected years; gross reserves projected around 51.7–52.1 billion U.S. dollars in 2022–2024.

*Source: 1zafea2020001 (IMF staff calculations and published tables).*

### Annex I. Assessing Macro-Financial Linkages in South Africa: A

### Annex I. Assessing Macro-Financial Linkages in South Africa: A Growth-at-Risk Approach

### Protracted low growth: context and diagnosed drivers
- Growth decelerated from the 2000s to the 2010s and has been very low for a protracted period.
- Key macro indicators showing the inflection:
  - Public debt-to-GDP ratio doubled in the past decade.
  - Unemployment rate rose 8 points to 29 percent in the third quarter of 2019.
  - Business confidence indicators remained structurally depressed and fell to very low levels in 2019.
- The inflection coincides with the global financial crisis in 2008–09 and is associated with:
  - Increased political uncertainty, declining government effectiveness, worsening regulatory quality, and weaker control of corruption.
  - A less favorable business environment and worsening micro-level constraints that likely depressed business confidence and private investment.

### Approach and data (Growth-at-Risk methodology)
- Method: Growth-At-Risk (GaR) links current financial conditions to the distribution of future growth outcomes to assess whether changes in financial conditions are macro-critical.
- Two analyses conducted:
  - Sensitivity of one-year-ahead growth forecasts to shocks in macro and financial variables, comparing pre-2008 and post-2008 periods.
  - Generation of distributions of growth forecasts for pre-2008 and post-2008 sample periods to illustrate potential structural slowdown.
- Indicators used:
  - Domestic leverage: credit-to-GDP gap (BIS) and credit growth.
  - Domestic financial conditions: term spread (long yields minus short rates), policy rate, equity returns, inflation, currency volatility, nominal effective exchange rate changes.
  - External variables: global growth, US Fed funds rate, VIX (implied volatility of US equity prices).

### Results: weakening macro-financial transmission and growth prospects
- Evidence that the impulse through macro-financial linkages weakened after 2008:
  - Pre-2008: a one standard deviation shock to credit growth (6.5 percentage points) raises one-year-ahead growth forecasts by 1.3 percentage points.
  - Post-2008: a one standard deviation shock to credit growth (1.9 percentage points) produces little change in one-year-ahead growth forecasts.
  - VIX shocks (weaker risk sentiment), normalized by shock size, show the response of one-year-ahead growth forecasts moderating from -0.6 percentage point in pre-2008 to -0.1 percentage point in post-2008.
  - A note that shocks to some variables, such as equity price returns, yield similar responses in both pre- and post-2008 samples.
- GaR-based growth forecasts:
  - Pre-2008-based GaR forecasts are relatively strong, consistent with favorable commodity prices and global demand and with staff assessment of South Africa’s growth potential.
  - Post-2008-based GaR forecasts point to further moderation in economic activity, signaling a structural shift in the distribution of downside risks to growth.

### Implications and conclusions
- The decline in the sensitivity of growth forecasts to financial shocks suggests that key macroeconomic and financial drivers would lend limited support to economic activity going forward.
- The results point to the importance of revisiting the growth model and addressing micro-level constraints, with the business environment and related micro constraints identified as a principal culprit.
- Policy implication: without addressing these micro-level constraints, South Africa risks failing to generate growth sufficient to improve per-capita income and population welfare.

*Source: Annex I, "Assessing Macro-Financial Linkages in South Africa: A Growth-at-Risk Approach."*

### 5.      Internationally, the extent of direct interconnectedness created by OFI in South Africa

### 5.      Internationally, the extent of direct interconnectedness created by OFI in South Africa 

### Direct interconnectedness of OFI
- Insurance companies' investment in OFI in South Africa: more than 30 percent of total OFI assets.  
- Pension funds' investment in OFI in South Africa: less than 10 percent of OFI assets.  
- OFI exposures to banks in South Africa: around 20 percent of OFI assets (SARB data suggests the bulk of the funds come likely from fund managers).  
- Bank lending to OFI: relatively small.  

### Indirect interconnectedness among Collective Investment Schemes (CISs)
- Indirect interconnectedness primarily stems from portfolio overlap.  
- Example: Portfolios of Absa MMF and Stanlib MMF (the two largest MMFs in South Africa) are similarly concentrated in a few large banks.  
- Consequence: Even without direct interfund lending, a shock from a common borrower would affect multiple funds simultaneously, increasing potential for indirect contagion (for example through fire sales).  
- Historical note: African Bank's default led all affected money-market funds to "break the buck" and triggered large redemptions.

### Composition of CIS by fund type and instrument (data for March 2019)
- Total assets (Billions of rand): 2,099 (Total across fund types and instruments).  
- By fund type (Billions of rand; percent share):
  - Multi Asset Funds: 1,037 — 49 percent.  
  - Interest Bearing Funds: 596 — 28 percent.  
  - Money Market Funds: 344 — 16 percent.  
  - Short Term Funds: 181 — 9 percent.  
  - Variable Term Funds: 71 — 3 percent.  
  - Equity Funds: 401 — 19 percent.  
  - Real Estate Funds: 65 — 3 percent.  
- Instrument breakdown (Billions of rand; percent share of instruments):
  - Money market products: 1,020 — 49 percent.  
  - Equity: 725 — 35 percent.  
  - Other CIS: 250 — 12 percent.  
  - Other products: 103 — 5 percent.  

### Strengths and vulnerabilities of interconnectedness
- Strength:
  - Interconnected financial system can be robust to shocks through substitution of lenders and buyers.  
- Vulnerabilities:
  - Strong and long transmission channels imply that a large shock in one part of the financial system could travel widely.  
  - Lenders such as MMFs, absent direct balance-sheet connections, can be affected simultaneously by shocks from common borrowers, raising indirect contagion risk during elevated stress.

### Public Debt Sustainability: context and baseline projections
- Recent developments:
  - Public debt has doubled in the last decade; gross financing needs (GFNs) have risen sharply.  
  - Government deficits averaged 4.9 percent of GDP in FY10/11–FY18/19.  
  - Public debt reached 57 percent of GDP in FY18/19.  
  - GFNs increased from about 2 percent of GDP in FY07/08 to 12 percent in FY18/19.  
- Debt composition and mitigating features:
  - Low shares in foreign currency: 10 percent.  
  - Short term instruments: 13 percent.  
  - Term to maturity of debt: about 13 years.  
- Contingent liabilities:
  - Total contingent liabilities increased from 8 percent of GDP in FY07/08 to 18 percent in FY18/19.  
  - Almost 80 percent of the increase is explained by SOE loan guarantees.  
  - Guarantees to SOEs account for 10.5 percent of GDP.  
- Baseline staff projections and assumptions:
  - Staff projects lackluster medium-term growth, limited fiscal consolidation, and strong transfers to SOEs.  
  - Public debt projected to exceed the 70 percent high-risk threshold by 2022 and continue to increase over the medium term.  
  - GFNs projected to exceed 15 percent of GDP in 2020 and beyond.  
  - GFNs would increasingly be met from domestic financing sources, primarily non-bank financial institutions.  
- Macroeconomic assumptions:
  - Real GDP growth: 0.4 percent in 2019 (0.8 percent in 2018).  
  - Medium-term growth projected at 1.5 percent.  
  - GDP deflator expected to average 4.9 percent in 2019–24.  
- Fiscal assumptions:
  - Primary deficit expected to improve over the longer term but remain above 1.5 percentage points of GDP.  
  - Assumed contingency reserves averaging about0.1 percent of GDP a year.  
  - Debt projections include stock-flow adjustments and valuation effects.

### Risks to the baseline
- Growth: median real GDP forecast error between 2010–18 was -1.2 percentage points. Possible over-projections of growth pose an upside risk to the debt-to-GDP forecasts.  
- Primary balance: risk from lower-than-anticipated revenue collection or higher-than-expected spending (including subsidies and public wages; negotiations for the next three years are due in 2020).  
- Interest rates: higher borrowing costs due to tightening global financial conditions or higher risk perception.  
- Contingent liabilities: weak SOE balance sheets could trigger further government support or guarantee calls.

### Scenario analysis and impacts on debt/GFNs
- Persistent low growth scenario:
  - If growth were permanently lower than in the baseline by 1 percentage point on average during 2020–24, the debt-to-GDP ratio would reach about 96 percent of GDP in 2024.  
- Primary balance shock scenario:
  - If the primary balance improved more gradually, deviating by a cumulative 1.4 percent of GDP during the medium term, projected debt would surpass 80 percent of GDP in 2024.  
  - The debt-to-GDP ratio would almost reach 85 percent if a temporary shock to growth with magnitude of one-standard-deviation were to materialize in 2020 and 2021.  
- Combined macro-fiscal shocks scenario:
  - Combination of standard shocks to growth and interest rates, a primary balance shock (temporary deterioration equivalent to one half of the 10-year historical standard deviation), and an exchange rate shock (consistent with the maximum movement over the past 10 years and an exchange rate pass-through of 0.25) would result in debt-to-GDP rising to more than 90 percent by 2024 and higher GFNs by about 3.5 percentage points of GDP by 2024.  
- Contingent liability shock scenario:
  - If all remaining SOE loan guarantees (excluding those already realized during the projection period for Eskom) were called and contingent liabilities of the road accident fund materialized, public debt would rise to 96 percent of GDP by 2024.  
- Positive reform scenario:
  - Faster implementation of structural reforms and reduction in SOE transfer (growth permanently higher than baseline by 1 percentage point on average during 2020–24 and transfers to SOEs halved in 2020 and stop in that year) would result in debt-to-GDP and GFNs returning below high risk thresholds at 66 percent of GDP and 10 percent of GDP respectively in 2024.

### Overall risk assessment and mitigating factors
- All shock scenarios for the debt level and gross financing needs flash red given the already weak baseline projections.  
- Mitigating factors:
  - Large domestic institutional investor base.  
  - Low share of foreign currency debt.  
  - Short-term nature of parts of the debt.  
- Additional risk factors:
  - High bond spreads (above 300 bps).  
  - Significant external financing requirements: 18 percent of GDP.  
  - Relatively high share of debt held by non-residents.

*International Monetary Fund — Chapter/Section content as provided in the source document.*

### 8.      The fan charts highlight the importance of adopting policies to reduce downside risks

### 8.      The fan charts highlight the importance of adopting policies to reduce downside risks

### Fan-chart findings and debt-distress probability
- Fan charts show downside risks materially raise the probability of debt distress.
- Under a scenario in which downside shocks are predominant, debt-to-GDP ratio reaches 90 percent of GDP by 2024 (using the upper end of the 75th–90th percentile fan chart).
- Under a scenario in which shocks are symmetric to both up and downsides (for example, triggered by somewhat faster progress in structural reforms), the probability of the debt exceeding the same high level is reduced and the probability of better than baseline outcomes increases significantly.
- Indicative thresholds used in the framework:
  - 70 percent of GDP for debt (debt-burden benchmark).
  - 15 percent of GDP for gross financing needs (GFN benchmark).
- Heat-map coloring rules:
  - Cell highlighted green if benchmark not exceeded under specific shock or baseline.
  - Yellow if exceeded under specific shock but not baseline.
  - Red if benchmark is exceeded under baseline.
- Note on fan-chart construction: the fan charts are generated using historical information and thus consider the downside scenario presented in the main text as an extreme event (involving a full downgrade to below investment grade, a deep recession generated by domestic reasons, and an extremely poor financial situation at Eskom which do not have historical precedents).

### Baseline public debt projections and fiscal dynamics (selected figures)
- Nominal gross public debt (in percent of GDP), selected years:
  - 2017: 40.3
  - 2018: 53.0
  - 2019: 56.7
  - 2020: 60.8
  - 2021: 65.3
  - 2022: 69.6
  - 2023: 73.5
  - 2024: 77.1 (figure shows progression to 80.6 in later projection panels)
- Public gross financing needs (in percent of GDP), selected years:
  - 2017: 9.8
  - 2018: 12.1
  - 2019: 11.6
  - 2020: 14.9
  - 2021: 15.5
  - 2022: 15.8
  - 2023: 17.0
  - 2024: 17.1
- Real GDP growth (in percent), selected years:
  - 2017: 1.8
  - 2018: 1.4
  - 2019: 0.8
  - 2020: 0.4
  - 2021: 0.8
  - 2022: 1.0
  - 2023: 1.3
  - 2024: 1.5
- Inflation (GDP deflator, in percent), selected years:
  - 2017: 6.5
  - 2018: 5.3
  - 2019: 3.9
  - 2020: 4.2
  - 2021: 5.2
  - 2022: 5.0
  - 2023: 4.9
  - 2024: 4.9
- Effective interest rate (in percent), selected years:
  - 2017: 7.8
  - 2018: 7.0
  - 2019: 7.0
  - 2020: 7.3
  - 2021: 7.3
  - 2022: 7.3
  - 2023: 7.5
  - 2024: 7.6
- Identified debt-creating flows (cumulative projection through 2024): 22.9 (cumulative change in gross public sector debt reported as 23.8 with identified flows 22.9 in panel).

### Stress-test scenarios and outcomes
- Downside stress-test scenarios considered include:
  - Primary balance shock
  - Real GDP growth shock
  - Real interest rate shock
  - Real exchange rate shock
  - Combined macro-fiscal shock
  - Contingent liability shock (including calling of remaining SOE loan guarantees plus contingent liabilities of the road accident fund)
- Selected stress-test outcomes (gross public debt, in percent of GDP):
  - Under Combined Shock and Contingent Liability Shock charts, gross public debt rises materially relative to baseline (charts show trajectories reaching higher ranges up to and beyond the 80s and 90s in percent of GDP depending on scenario and year).
- Upside stress-test (Permanently Higher Growth and Reduced SOE Transfers — PHGRST):
  - Example scenario real GDP growth path: 2019: 0.4; 2020: 1.8; 2021: 2.0; 2022: 2.3; 2023: 2.5; 2024: 2.5.
  - Primary balance under PHGRST improves to: 2019: -2.5; 2020: -1.9; 2021: -0.8; 2022: -0.2; 2023: 0.4; 2024: 1.2.
  - Under PHGRST, gross public debt declines relative to baseline (charts show lower debt-to-GDP trajectories).

### External debt and external financing vulnerabilities
- Net portfolio inflows in 2018: 0.7 percent of GDP.
- Net FDI inflows in 2018: 0.2 percent of GDP.
- Other investment in 2018: 2.1 percent of GDP.
- External debt metrics:
  - External debt peaked at 49.6 percent of GDP in 2017.
  - External debt declined to 46.8 percent of GDP in 2018.
  - External debt is projected to remain slightly above 50 percent of GDP over the medium term (2019–24).
- Gross external financing needs (GEFNs):
  - GEFNs increased to 18 percent of GDP in 2018, from 14 percent in 2017.
  - The majority of GEFNs in 2018 was short-term external debt on a remaining maturity basis: 14.7 percent of GDP.
  - On current policies, GEFNs are projected to fluctuate around 20 percent of GDP during 2019–24, with short-term debt accounting for about 80 percent of the total.
  - Gross external financing needs (in billions of US dollars) reported for projection years (selected): 2019: 67.2; 2020: 69.8; 2021: 74.9; 2022: 72.1; 2023: 72.4; 2024: 75.4 (table lists sequence with corresponding percent of GDP: 2019: 18.3; 2020: 19.5; 2021: 20.5; 2022: 19.0; 2023: 18.4; 2024: 18.5).
- Shock sensitivity:
  - A 30 percent currency depreciation could push external debt above 65 percent of GDP, despite rand-denominated external debt representing half of total external debt.
  - Other shocks (widening of non-interest current account deficit, deceleration in real GDP growth, rise in interest rates) would lead to only moderate increases in external debt.

### Policy implications and recommendations (as stated or implied in source)
- Adopt policies to reduce downside risks and the probability of debt distress.
- Accelerate progress in structural reforms to shift shock distributions toward symmetric up/down outcomes and increase the probability of better-than-baseline debt outcomes.
- Address reliance on non-FDI inflows for financing current account deficits, as dependence on non-FDI flows raises external vulnerabilities and GEFNs.

*Source: IMF staff (South Africa DSA chapter).*

### Annex VI. Risk Assessment Matrix

### Annex VI. Risk Assessment Matrix

### Overview and Methodology
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

### Global risks
- Rising protectionism and retreat from multilateralism
  - Likelihood: High
  - Time Horizon: ST, MT
  - Expected Impact on Economy: H/M. Impact on the external accounts and growth would depend on the extent to which trade flows are disrupted.
  - Policy Responses:
    - Structural measures to promote growth domestically and regional integration initiatives.
    - Support for multilateralism and the global trading system.
    - Fiscal consolidation to ensure medium-term debt stabilization.

- Sharp rise in risk premia (abrupt change in global risk leading to sudden, sharp increases in interest rates and associated tightening of financial conditions)
  - Likelihood: High
  - Time Horizon: ST
  - Expected Impact on Economy: H/M. Capital flow reversals (including prompted by rating downgrades) would affect the external and fiscal positions. Spillovers to the financial system likely.
  - Policy Responses:
    - Monetary policy tightening if currency depreciation pushes inflation expectations above the target range.
    - Foreign exchange liquidity provision in disorderly market conditions.
    - If fiscal financing becomes problematic, tighten fiscal policy.
    - Measures to address capital flow reversals (see below).

- Weaker-than-expected global growth (U.S.; Europe; China)
  - Likelihood: Medium (U.S.), High (Europe), High (China)
  - Time Horizon: ST-MT
  - Expected Impact on Economy:
    - U.S.: M. Protracted period of lower growth and worse twin deficits, especially if accompanied by lower commodity prices.
    - Europe: H/M. Deterioration in growth, employment, and worsening of twin deficits, especially if accompanied by lower commodity prices. Potential capital flow reversal.
    - China: H/M. Deterioration in growth, employment, and worsening of twin deficits, especially if accompanied by lower commodity prices. Potential capital flow reversal.
  - Policy Responses:
    - Structural measures to promote growth domestically.
    - Fiscal consolidation to ensure debt stabilization over the medium term while protecting the poor.
    - If external financing is reduced, tighten monetary and fiscal policies.
    - Foreign exchange liquidity provision in disorderly market conditions.

### Domestic risks
- Protracted domestic policy uncertainty because of governance setbacks or delays in reform implementation
  - Likelihood: Medium
  - Time Horizon: ST-MT
  - Expected Impact on Economy: H. Low growth, larger fiscal deficits, higher public debt, a ratings downgrade triggering capital outflows. Potentially, destabilizing financial conditions.
  - Policy Responses:
    - Greater consistency in policy statements.
    - Structural measures to strengthen governance in SOEs.
    - Increase competition in product markets and increase labor market flexibility.
    - Anti-corruption and anti-money laundering measures to boost confidence.

- Eskom’s inability to pay debt
  - Likelihood: High
  - Time Horizon: ST-MT
  - Expected Impact on Economy: H. Eskom being macro-critical (95 percent of domestic electricity production and 16 percent of GDP in size), major adverse consequences for the economy.
  - Policy Responses:
    - Measures to stabilize Eskom finances in the short run and overhaul the business model over the medium term to create space for greater private sector participation.
    - Strict enforcement of structural conditionality for fiscal support.

- Excessive budget deficits or other policy missteps that reduce market confidence
  - Likelihood: High
  - Time Horizon: ST-MT
  - Expected Impact on Economy: H. Increases in interest rates, sovereign credit rating downgrades to speculative grade, capital outflows, financial instability.
  - Policy Responses:
    - Measures to reduce fiscal deficit, especially the fiscal cost of bailing out Eskom and other SOEs, while protecting social outlays.
    - Ameliorating governance and improving spending efficiency.
    - Measures to address financial risks (see below).

- Deterioration in banks’ asset quality and liquidity conditions owing to protracted low growth
  - Likelihood: Medium
  - Time Horizon: MT
  - Expected Impact on Economy: H. Lower lending to households and corporates as bank balance sheet conditions weaken, with adverse impact on growth, fiscal outlook, and financial and external stability.
  - Policy Responses:
    - Asset quality reviews and adjustment to provisioning.
    - Enhancement to risk analysis and action to mitigate risks.
    - Foreign exchange liquidity provision in disorderly market conditions.

*Source: Annex VI. Risk Assessment Matrix (as provided in the content unit).*

### 6.      The government has taken initial steps to restore the integrity and capacity of SOEs.

### 6.      The government has taken initial steps to restore the integrity and capacity of SOEs.

### Progress on governance reforms and appointments
- New boards and management have been appointed at Eskom, Denel, Transnet, SAA and SABC, among others.
- New boards have been mandated with improving governance and restoring financial sustainability.
- A Presidential SOE Council has been established to provide political oversight and strategic management in the reform, repositioning and revitalization of SOEs.
- To facilitate the rebuilding of capacity, the government allocated additional financial resources in late 2019—R1.3 billion for the NPA and R1 billion for SARS.

### Investigations, asset recovery, and enforcement activity
- Several SOEs, namely Eskom, national oil company Petro SA, the Passenger Rail Agency of South Africa (PRASA), the South African National Roads Agency (SANRAL), among others, are undergoing forensic investigations.
- In November 2019, the NPA announced that more than R2.8 billion (about US$189 million) has been recovered in the past financial year from the proceeds of corruption, money laundering, cyber and environmental crimes through the NPA’s Asset Forfeiture Unit.
- At Eskom:
  - Evidence of irregular procurement practices serving private interests is being further investigated by the State Capture Inquiry.
  - Executives are pursuing investigations into fraud, corruption and other crimes at the power utility.
  - Global consultancy McKinsey paid back R1 billion to Eskom for dubious contracts.
  - The power utility is in a process to recover millions from the Gupta family-linked asset management company, Trillian.

### Implementation challenges and outstanding risks
- Despite government efforts in governance reforms, progress in implementation has been slow.
- Relatively few high-profile prosecutions of individuals accused of corruption have occurred to date, although the NPA has recently ratcheted up investigations and is likely to launch some major prosecutions in the coming months.
- Several SOEs continue to face major operational and financial challenges.
- Several prominent SOE CEOs resigned in 2019, often citing excessive political interference and insufficient government support.
- Given the depth and breadth of state capture and corruption, sustained efforts over time—especially the establishment of credible deterrence mechanisms—will be needed to address the challenges.

### Selected recommendations and actions reported in Table A8.1 (Parliament and commission inquiries; SARS; NPA; state-capture commissions)
- Parliament inquiry into Governance, Procurement and the Financial Sustainability of Eskom
  - Key finding: Systematic flouting of governance rules rendered Eskom financially unsustainable.
  - Recommendation: Law enforcement agencies to pursue investigations and prosecution of those implicated.
  - Action taken so far: A new board and senior executives were appointed; executives are pursuing investigations into fraud, corruption and other crimes at the power utility.
- Commission of inquiry into tax administration and governance by SARS
  - Key finding: "Massive failure of integrity and governance" under the leadership of the former commissioner.
  - Recommendations and actions:
    - Removal of the former SARS Commissioner (the former Commissioner was removed, and several senior staff were forced to resign).
    - Criminal prosecution for the awarding of a contract to Bain & Co for the restructuring of SARS (pending/under consideration).
    - A new commissioner was been appointed through a transparent selection process.
    - Re-establishment of the Large Business Centre, the Compliance Unit and establishment of a high-level Integrity Unit.
    - Amendment of the SARS Act to require the preparation of an annual business plan by SARS to be approved by the Finance Minister (action noted).
- Commission of Inquiry into the NPA
  - Key finding: Two senior officials from the NPA are not fit and proper to hold their respective offices.
  - Recommendation: Two senior officials at the NPA to be removed from their positions.
  - Action taken so far: The two officials were removed in April 2019 pending a parliamentary process.
- Judicial Commission of Inquiry into Allegations of State Capture
  - Status: The commission is ongoing and is expected to continue at least into 2020.
- Commission of inquiry into allegations of impropriety regarding the PIC
  - Status: The commission is expected to complete its work in late 2019.
  - Action taken so far: The PIC has fired its investment manager linked to a R4.3 billion deal done with Ayo Technology Solutions.

### Implications for rebuilding capacity and next steps
- Rebuilding capacity requires both additional resources (examples: R1.3 billion for the NPA; R1 billion for SARS) and sustained institutional reforms.
- Continued forensic and criminal investigations, recovery of proceeds (R2.8 billion recovered in the past financial year through the NPA’s Asset Forfeiture Unit), and transparent prosecutions are critical to restoring credibility and deterrence.
- The scale of state capture and entrenched corruption implies that sustained efforts over time will be necessary to restore the integrity and financial sustainability of SOEs.

*Source: South Africa—Staff Report for the 2019 Article IV Consultation (section 6 and Table A8.1).*

### 2019. Other series reviewed included the import and export price series, and the monthly mining

### 1zafea2020001 - 2019. Other series reviewed included the import and export price series, and the monthly mining series.

### IMF–World Bank coordination and planned work program
- IMF South Africa team met with World Bank South Africa team in November 2019 to discuss macrocritical structural issues.
- Agreed economic challenges: maintaining macroeconomic stability, boosting growth, making growth more inclusive to promote job creation and social cohesion.
- Information-sharing requests:
  - IMF requests updates on 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 requests updates on progress in macroeconomic stability (fiscal, monetary, and financial sector policies) and macrocritical structural reforms. Timing: when milestones are reached (and at least semiannually).
- Joint and separate work programs for May 2019–April 2020 include World Bank items (SOE legislative/governance reforms; township economies; financial stability/inclusion/fintech; infrastructure finance; digital economy diagnostics; statistical capacity building), IMF analytical work (macro-financial linkages; monetary policy transmission; exchange rate volatility; growth diagnostics; drivers of fiscal expansion and public debt accumulation; SOEs; product and labor market reforms; corruption and governance; buffers and vulnerabilities; digitalization; financial inclusion; education), and joint products (coordination on structural reform advice; an FSAP).

### Statistical issues and data adequacy (As of January 10, 2020)
- General: Data provided to the IMF are adequate for surveillance.
- National Accounts:
  - Real sector data for IFS are timely.
  - Statistics South Africa (SSA) compiles GDP by production and has taken over GDP by expenditure from the South African Reserve Bank (SARB).
  - GDP compiled according to SNA2008, base year 2010.
- Labor market:
  - Quarterly labor market statistics published one month after quarter end.
  - New Quarterly Labor Force Survey (QLFS) launched January 2008; new Master Sample introduced since 2015 based on 2011 census data.
- Price statistics:
  - CPI covers all households living in metropolitan and urban areas.
  - CPI weights based on Living Conditions Survey (LCS) 2014/15 and other sources.
  - Indices in the CPI are based to 100 at December 2016.
- Government Finance Statistics:
  - Movement toward GFS Manual 2014 implementation needed; reconciliation between National Treasury fiscal data and data reported to IMF’s STA required.
  - National Treasury fiscal data cover part of general government and lack corresponding balance sheet data; SARB-compiled data for GFS database cover all general government subsectors and include balance sheet data.
- Monetary and financial statistics:
  - SARB monetary statistics consistent with the Monetary and Financial Statistics Manual.
  - Regular, good-quality monetary statistics reported for IFS; timeliness of data on other financial corporations can improve.
- Financial sector surveillance:
  - South Africa reports Financial Soundness Indicators (FSIs) to the Fund; all core FSIs, ten encouraged FSIs for deposit takers and two encouraged FSIs for the real estate sector are reported monthly.
  - Two encouraged FSIs for deposit takers and two encouraged FSIs for households reported quarterly.
  - Encouraged residential real estate price index ceased to be reported to STA in 2016.
  - Participation in Financial Access Survey (FAS) and reporting two indicators related to U.N. SDGs (commercial bank branches per 100,000 adults; ATMs per 100,000 adults).
- External sector statistics:
  - Balance of payments and international investment position data reported quarterly, broadly consistent with BPM6.
  - Improved coverage of SACU trade flows in 2013; further work needed to reduce errors and omissions.
  - International reserves disseminated per IMF’s Data Template on International Reserves and Foreign Currency Liquidity.
  - Participation in CPIS and CDIS.
- Data standards and reporting:
  - South Africa subscribed to the Special Data Dissemination Standard (SDDS) on August 2, 1996, and is in observance of specifications for coverage, periodicity, and timeliness.
  - A Report on Observance of Standards and Codes—Data Module, Response by the Authorities, and Detailed Assessments Using the DQAF was published on October 16, 2001.

### Recent economic developments and outlook (authorities’ statement, January 24, 2020)
- 2019 performance:
  - Growth estimated at 0.5 percent in 2019.
  - Sectors: declines in mining, manufacturing and transport; positive growth in trade, government services and finance.
  - Unemployment rate increased to 29.1 percent in the third quarter of 2019.
- Growth expectations:
  - 1.2 per cent in 2020.
  - 1.6 per cent in 2021.
  - 1.7 per cent in 2022.
  - Rationale: gradual recovery in confidence and investment.
- Inflation:
  - Headline CPI inflation averaged 4.7 percent in 2018.
  - Headline CPI averaged 3.6 percent in November 2019.
  - Headline CPI expected to average 4.7 percent in 2020, 4.6 percent in 2021 and 4.5 percent in 2022.
  - Food price inflation continued to surprise on the downside; currency strengthened contributing to SARB revisions down in January 2020.
- External sector:
  - Current account deficit narrowed from 3.5 percent of GDP in 2018 to 3.3 percent in 2019 due to low imports.
  - Foreign exchange reserves increased from $51.6 billion in 2018 to $55.1 billion at the end of December 2019, representing 5 months of import cover.
  - Medium-term expectation: current account expected to widen somewhat as investor confidence recovers.

### Fiscal policy and public finances
- Authorities’ stance:
  - Committed to prudent fiscal policy and fiscal sustainability while creating space for large infrastructural projects.
  - Emphasis on achieving a low primary balance, excluding Eskom provisions, by 2022/23.
- Fiscal projections and pressures:
  - Fiscal deficit projected to increase to an average of 6.2 percent over the next three years from 4.3 percent in 2018.
  - Authorities plan fiscal consolidation and containing debt accumulation through measures including reducing the public sector wage bill and additional revenue measures.
  - Slower-than-expected revenue growth and slow nominal GDP growth place pressure on the fiscal framework.
- Revenue mobilization and expenditure efficiency:
  - Strengthening South African Revenue Services capacity, re-establishment of the Large Business Centre.
  - Reforms to enhance governance and efficiency of public spending; Public Procurement Bill developed for submission to Parliament in 2020.

### Debt management and SOE reforms
- Debt outlook:
  - Authorities project total gross loan debt to remain slightly above 70 percent of GDP at 71.3 percent in the medium term.
  - Without politically difficult decisions on wage bill measures and economic reforms, debt likely to continue rising over the medium term and beyond.
- SOE risks and measures:
  - Fiscal risks from SOEs, particularly Eskom, acknowledged.
  - Authorities will provide financial support to Eskom over the medium term to secure energy supply and mitigate risks to the economy and the fiscus.
  - Measures instituted to strengthen SOE governance and finances.
  - Electricity sector restructuring outlined in the reformed Electricity Supply Industry paper (Eskom Roadmap) aimed at reducing need for government support, expanding renewable energy output and cutting fuel costs.
  - New Integrated Resources Plan (IPP) promulgated to guide expansion and diversification of electricity supply.
- Transport sector:
  - South African Airways (SAA) placed under voluntary business rescue; consultations on financing modalities occurred prior.

### Monetary policy
- SARB performance:
  - SARB has made progress in shifting inflation closer to the middle of the 3–6% target range.
  - Disinflation effort ongoing; inflation expectations remain in the upper half of the target range.
  - MPC revised down its inflation forecasts; reduced rates by 25 basis points as of 16 January 2020.
- Policy view:
  - Authorities agree interest rates are not the right tool for fixing structural growth challenges.
  - In context of lower inflation and improved risk profile, monetary policy can provide some support to borrowers without jeopardizing inflation objective.

### Financial sector policy and regulation
- Resilience and structure:
  - Financial sector resilient due to sizable capital and liquidity buffers, robust regulatory and financial infrastructure, deep domestic capital markets, and low reliance on foreign currency funding.
- Regulatory reforms:
  - Financial Sector Regulation Act (2018) introduced “twin peaks” model: FSCA for market conduct; Prudential Authority for prudential regulation; SARB assigned explicit responsibility to enhance and monitor financial stability.
  - SARB designated six financial institutions as systemically important to enable macroprudential requirements if needed.
  - Financial Sector Laws Amendment Bill (FSLAB) published for comment in September 2018; expected introduction in calendar year 2020 to introduce a resolution framework and an explicit deposit insurance scheme.
- Market developments:
  - Three new banks with focus on digital channels expected to support competition and financial inclusion.
  - Significant growth in fintech firms, especially payments; Intergovernmental Fintech Working Group (IFWG) established to coordinate regulatory understanding and policy responses.
  - Authorities intend to reform framework for cross-border flows to improve simplicity and transparency; additional measures to combat illicit financial flows are being developed.
  - Ongoing reform of key interest rate benchmarks to align with international best practice, enhance transparency and efficiency of money markets, and improve monetary policy implementation and risk monitoring.

### Structural and governance reforms
- Structural reform actions and plans:
  - Progress on easing visa regime to support tourism, demarcation of new special economic zones, and policy directive for licensing/auctioning high demand broadband spectrum.
  - Planned reforms in transport, water, telecommunications, industrial, trade and competition policy to address microeconomic binding constraints (referenced in the October 2019 discussion paper “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa”).
- Governance and anti-corruption:
  - Strengthened capacity of the National Prosecuting Authority.
  - Judicial commission of inquiry into the Public Investment Corporation completed and final report submitted to the President.
  - Judicial commission of inquiry into allegations of state capture is proceeding.

### Conclusion (authorities’ view)
- Authorities recognize mounting pressures and remain committed to addressing macroeconomic challenges and ensuring fiscal sustainability to place the economy on an accelerated growth trajectory.
- Commitment to fiscal consolidation and expedited structural reforms to support fiscal adjustments and achieve inclusive growth that will create jobs, reduce poverty, and inequality.
- Authorities look forward to continued engagement with the Fund, including through technical support.

*Source: IMF staff report content and authorities’ statement as contained in the provided document excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1zafea2020001.pdf_