South Africa: Facing the Challenges of the Global Economy

IMF News, May 8, 2013

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IMF most recent forecast: global growth of 3.3 percent this year, and 4 percent in 2014.
Three-speed global recovery: emerging markets and developing countries generally doing well; some advanced economies recovering while others lag.
Europe not expected to return to growth before 2014, and then at a modest 1 percent rate.
U.S. rebound: nearly 2 percent this year and strengthening to 3 percent in 2014.
Emerging markets and low-income economies estimated to have provided roughly three-quarters of world growth since the 2008 crisis.
India’s growth around 6 percent a year, down from 8 percent a few years ago.
China not likely to see sustained double-digit growth again.

Unconventional monetary policies by advanced economies (e.g., Federal Reserve, Bank of Japan) have aided global recovery but raise concerns for emerging markets.
So far: no observed exchange rates being pushed out of alignment and no signs of asset bubbles; caution and study of exit strategies recommended.
South Africa’s external openness: sum of external assets and liabilities equals about 170 percent of GDP — a vulnerability to capital outflows.
A sudden outbreak of global risk aversion or market turbulence could hinder financing of South Africa’s twin deficits—budget and current account.

Europe requires both national and collective actions; fiscal policy is crucial:
- Countries that can afford to support their economies should do so in ways that encourage private investment and boost demand.
- Others need sustained commitment to adjustment for sustainable public finances.
Monetary actions referenced: LTRO bank funding scheme and conditional OMT monetary transmission preservation scheme.
Additional unconventional monetary measures may be required to restore credit channels.
European Banking Union actions needed:
- Bank recapitalization through the European Stability Mechanism.
- A comprehensive banking union adding a single resolution authority to the recently established supervisory authority.
- A deposit insurance fund.

Regional output: grew 5.1 percent last year, and should accelerate to 5.4 percent this year and 5.7 percent in 2014.
Growth stronger in oil-exporting and low-income countries; middle-income countries like South Africa have grown more slowly.
Key drivers: strong investment, favorable commodity prices, prudent macroeconomic management, improved institutional capacity and governance.
Risks:
- A renewed global downturn, especially a sharp drop in demand from emerging markets, with implications for commodity prices.
- In a few countries, rising inflation remains a challenge; in others, containing fiscal expansion is important.
Policy advice for African countries:
- Rebuild fiscal buffers to save for future downturns while avoiding cuts to productive public investment and pro-poor spending.
- Consider widening tax bases, reforming badly run programs, and replacing costly energy subsidies with targeted measures to protect the poor.
- Address infrastructure bottlenecks (particularly electricity generation) and job creation.
- Improve management of natural resource revenues to avoid the resource curse; IMF technical assistance focused on this area.

South Africa benefits from regional growth: the Number Two market for exports after Europe is the countries to the north, accounting for 15 percent of exports—roughly the same export share as China.
Stock of South African direct investment in the rest of Africa equals approximately 5 percent of the country’s GDP, up from 1 percent before the global financial crisis.
Southern African Development Community could soon become South Africa’s biggest market for manufactured goods.
Drivers of modest recovery: increased export demand from the region and China, exchange rate depreciation, and public infrastructure investment.
IMF outlook for South Africa:
- Real GDP growth averaged 3.3 percent in 2010-11, falling to 2.5 percent in 2012.
- IMF expects a modest recovery this year to 2.8 percent, and possibly 3.3 percent in 2014.
External downside risks: renewed downturn in Europe and the emerging markets; weaker commodities prices.

Unemployment and labor market:
- Overall unemployment at 25 percent.
- One in two young South Africans is unemployed.
- Employment especially low in the private sector.
Productivity and wages:
- Real wage growth has outstripped productivity growth.
Competitiveness and trade:
- Competitiveness problems manifest in a growing trade deficit despite weak global demand.
Infrastructure bottlenecks:
- Power and transportation bottlenecks are a drag on the economy.
Business climate:
- Depressed business confidence has held back private investment despite strong corporate performance.
Structural rigidities:
- Rigidities in labor and product markets constrain job creation and competition.
- Collective bargaining system needs to serve the interests of the entire population rather than only insiders.
- Greater competition in product markets would allow new businesses, including small and medium-sized enterprises, lower prices, and increased incentives for innovation and productivity.

Maintain prudent macroeconomic policies to create an economic climate conducive to growth and job creation.
Implement medium-term strategy (as outlined in the 2013 budget) to rebuild fiscal buffers and reduce external vulnerabilities.
Pursue structural reforms to increase growth and employment, including:
- Labor-market reforms to broaden the benefits of the collective bargaining system.
- Product-market reforms to enhance competition and support SMEs.
- Address power and transport bottlenecks through infrastructure investment.
- Protect productive public investment and effective pro-poor spending while rebuilding fiscal buffers.
Consider a Grand National social bargain to overcome political obstacles to reform.
Implement National Development Plan priorities: infrastructure, education, healthcare, and public service delivery.
Urgent action urged: "South Africa needs to fix the future, starting today."
Risks of inaction:
- Weakened growth prospects, hampered efforts to reduce unemployment and inequality.
- Potential decline of confidence and pullback of capital flows.
- Long-run risk to social stability if inclusive growth is not delivered.

IMF committed to working with South Africa to provide advice and analysis to help address the identified problems and unleash the economy’s capabilities.
As a G-20 member and the largest economy in sub-Saharan Africa, South Africa has a role in ensuring global economic stability and contributing to sustained and balanced growth by addressing its domestic challenges.

Source: David Lipton, "South Africa: Facing the Challenges of the Global Economy," May 8, 2013.