IMF Executive Board Concludes 2016 Article IV Consultation with South Africa
IMF News, July 7, 2016
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- Published: July 7, 2016
Main findings and context
- South Africa has made "impressive economic and social progress in the past two decades," but "deep-rooted structural problems—infrastructure bottlenecks, skill mismatches, and harmful insider-outsider dynamics—are holding back growth and exacerbating unemployment and inequality."
- Vulnerabilities identified:
- Current account deficit "remains among the highest in emerging markets" despite a large currency depreciation and some correction.
- Rising government debt, low growth, financially-weak state-owned enterprises (SOEs), and spending pressures have increased vulnerabilities in the real and fiscal sectors.
- Most private corporations’ balance sheets remain strong, but "financial indicators signal some deterioration ahead."
- Headline inflation at "6.1 percent in May 2016" was above the South African Reserve Bank’s (SARB) "3–6 percent band," driven by fuel base effects and rising food prices due to drought.
Macroeconomic outlook and risks
- Growth projections:
- Real GDP growth projected at "0.1 percent in 2016," "1.1 percent" in 2017, approaching "2–2½ percent" in the outer years as shocks dissipate and new power plants are completed.
- Real GDP per capita: projected "-1.6" for 2016 and "-0.6" for 2017 (annual percentage changes as shown in indicators).
- Unemployment:
- Unemployment rate projected to rise from "25.4" (2015) to "26.1" (2016) and "26.7" (2017) percent of labor force (annual averages).
- External sector:
- Current account deficit forecast to narrow slightly in 2016 but rise to "4¾ percent of GDP in 2017–18" on weaker terms of trade.
- Current account balance (billions of U.S. dollars): "-13.7" (2015), "-11.0" (2016), "-13.2" (2017).
- Current account percent of GDP: "-4.3" (2015), "-4.1" (2016), "-4.8" (2017).
- Inflation:
- Projected at "6.7 percent in 2016" before easing to "5.6 percent by end-2017."
- Downside risks emphasized:
- Linkages with China, heightened global financial volatility, and domestic politics/policies that harm confidence.
- Potential amplification via linkages between capital flows, the sovereign, and the financial sector, especially with sovereign credit rating downgrades to speculative grade.
- Upside scenario:
- Recent dialogue between social partners could catalyze reform implementation and invigorate growth.
Executive Board assessment and policy recommendations
- General assessment:
- Directors recognized South Africa’s strong institutions and policy frameworks that delivered macroeconomic stability over two decades.
- Directors welcomed recent social partner dialogue but underlined the weak growth outlook and significant downside risks.
- Structural reform recommendations (wide-ranging):
- Greater product market competition.
- More labor market inclusiveness.
- Better education.
- Improved governance.
- Favor an initial, focused set of tangible measures to generate reform momentum and provide near-term confidence benefits.
- Welcome progress in easing infrastructure bottlenecks.
- Fiscal policy recommendations:
- 2016 Budget considered "appropriately ambitious" but "additional measures might be required to stabilize debt over the medium term."
- Recommended measures to boost spending efficiency, including containing the public wage bill, and increasing private sector participation in SOEs.
- If measures do not materialize and growth underperforms, implement a package of growth-friendly fiscal consolidation measures while protecting social spending.
- Underscored need to improve SOE performance and strengthen their governance.
- Monetary policy recommendations:
- Commended SARB for a balanced stance.
- Suggested SARB consider holding interest rates steady unless core inflation or inflation expectations rise substantially, since past hikes are still filtering through and the weak economy should keep inflation contained.
- Encouraged SARB to consider ways to enhance its inflation targeting regime to guide expectations within the target band.
- Financial sector recommendations:
- Recognized soundness of the financial sector per SARB stress tests.
- Encouraged stepped up monitoring of financial sector risks and contingency planning given pressures from weak economy, tightening financial conditions and regulatory changes.
- External sector recommendations:
- Viewed exchange rate flexibility, favorable currency composition of external debt, and South Africa’s net external creditor position as strengths.
- Encouraged authorities to seize opportunities to increase reserves.
Key numeric indicators (selected)
- Social and population indicators:
- Nominal GDP (2015, billions of U.S. dollars): "315"
- GDP per capita (2015, U.S. dollars): "5727"
- Headcount ratio at $1.90 a day (2011, percent of population): "16.6"
- Undernourishment (2012, percent of population): "5.0"
- Urban population (percent of total), 2014: "64"
- Life expectancy at birth (years), 2014: "57"
- Gini index: "63.4"
- Income share held by highest 10 percent of population (2011): "51.3"
- Income share held by lowest 20 percent of population (2011): "2.5"
- Selected economic indicators (annual percentage change unless otherwise indicated):
- Real GDP: "2.2" (2012), "2.3" (2013), "1.6" (2014), "1.3" (2015), "0.1" (2016 proj.), "1.1" (2017 proj.)
- CPI (annual average): "5.8" (2012), "4.6" (2013), "6.7" (2014), "6.2" (2015), "6.7" (2016 proj.), "5.6" (end-2017 proj.)
- Unemployment rate (percent of labor force, annual average): "24.9" (2012), "24.7" (2013), "25.1" (2014), "25.4" (2015), "26.1" (2016 proj.), "26.7" (2017 proj.)
- Gross government debt (percent of GDP, national government): "41.0" (2012), "44.0" (2013), "46.9" (2014), "49.8" (2015), "51.5" (2016 proj.), "52.6" (2017 proj.)
- Government bond yield (10-year, percent): "8.2" (2012), "9.3" (2013), "…" (2014–2015 not listed; 2016 May data referenced)
- External and financial indicators:
- Current account balance (billions of U.S. dollars): "-19.7" (2012), "-21.1" (2013), "-19.1" (2014), "-13.7" (2015), "-11.0" (2016 proj.), "-13.2" (2017 proj.)
- Current account percent of GDP: "-5.0" (2012), "-5.7" (2013), "-5.4" (2014), "-4.3" (2015), "-4.1" (2016 proj.), "-4.8" (2017 proj.)
- Gross reserves (billions of U.S. dollars): "50.7" (2012), "49.6" (2013), "49.1" (2014), "45.8" (2015)
- Total external debt (percent of GDP): "35.7" (2012), "37.3" (2013), "41.3" (2014), "39.4" (2015), "50.6" (2016 proj.), "51.4" (2017 proj.)
- Nominal effective exchange rate (percentage change, end-period): "-5.2" (2012), "-15.4" (2013), "-16.6" (2014), "-18.2" (2015)
- Exchange rate (Rand/U.S. dollar, end-period): "10.5" (2012), "11.6" (2013), "15.6" (2014)
- Monetary policy rates (selected):
- SARB policy rate increases: "50bps in 2015" and "75bps in 2016" to "7 percent"
- Repo rate (percent, end-period): "5.75" (2012), "6.25" (2013); 2016 May data referenced for some rates.
IMF Press Release No. 16/322; July 7, 2016. IMF Communications Department.