IMF Executive Board Concludes 2018 Article IV Consultation with South Africa
IMF News, July 30, 2018
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- Published: July 30, 2018
Recent economic developments and structural context
- Amid a marked growth deceleration, some of South Africa’s economic and social achievements after the end of apartheid have recently unwound.
- Economy characteristics:
- Globally positioned, sophisticated, and diversified, but gaps in physical infrastructure and education create large productivity differentials across sectors.
- Low consumer and business confidence has dampened productivity growth.
- Social and labor outcomes:
- Per-capita growth has turned negative.
- Poverty rate stands at around 40 percent.
- Unemployment has crept up to 27 percent—almost twice that level for the youth.
- Income inequality is one of the highest globally.
- Recent policy stance and outcomes:
- FY17/18 consolidated fiscal deficit is estimated to have expanded to 4.8 percent of GDP from 4 percent of GDP in FY16/17.
- Monetary policy was eased by a total of 50 basis points, in July 2017 and March 2018.
- GDP growth edged up only slightly from 0.6 percent in 2016 to 1.3 percent in 2017.
- Inflation moderated to 5.3 percent in 2017.
- Current account deficit narrowed to 2.5 percent of GDP in 2017.
- Major obstacles to growth identified:
- Regulatory environment not conducive to private investment.
- Inefficiencies in state-owned enterprises (SOEs) increasing the cost of key inputs.
- Labor market rigidities and insufficient competition in product markets.
- Corruption and policy uncertainty.
Macroeconomic outlook and baseline projections
- Staff baseline projections on current policies:
- Real GDP growth: 1.5 percent in 2018 and 1.8 percent in the outer years.
- Growth slightly above population growth.
- Inflation: 4.9 percent in 2018 and edge higher to 5.5 percent in the outer years.
- Current account deficit: expected to widen to 2.9 percent of GDP in 2018 and to around 3½ percent of GDP over the medium term.
- Upside potential and constraints:
- Upside: addressing structural bottlenecks could boost growth significantly, aided by deep and liquid financial markets, a solid domestic investor base, a floating exchange rate, and limited susceptibility to exchange rate and rollover risk.
- Constraints: fast growing debt has constrained policy space.
Risks and vulnerabilities
- Downside risks judged more prominent than upside in the near term.
- Fiscal and public sector risks:
- Significant vulnerabilities from fiscal risks related to weak and poorly managed state-owned enterprises and other spending pressures.
- External and financial risks:
- Large gross external financing needs.
- Current account deficit financed by flows prone to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings.
- Disruption in trade flows and a fall in commodity prices would worsen the twin deficits and dampen growth.
- Financial sector resilience:
- South Africa showed resilience to recent market volatility, supported mainly by the floating exchange rate.
- Pockets of vulnerabilities in small and medium-sized banks warrant continued vigilance.
Executive Board Assessment — findings and policy recommendations
- General assessment:
- Directors acknowledged important progress since the end of apartheid, supported by strong economic institutions, but noted that unemployment and inequality remain high.
- Welcomed measures announced by the new administration to improve governance and reignite business and consumer confidence.
- Encouraged leveraging the recent political transition to advance the reform agenda in a well-sequenced manner.
- Governance and anti-corruption:
- Urged authorities to deepen the fight against corruption.
- Recommended forceful application of the Public Financial Management Act to increase deterrence against corruption.
- Structural reforms to boost productivity and investment:
- Advance ambitious reforms in product and labor markets to raise productivity and enhance private sector participation.
- Complete measures in the telecommunications and mining sectors to attract higher private investment and create employment.
- Rethink SOE business models, including by engaging in strategic equity partnerships with the private sector, to contain fiscal risks.
- Fiscal policy stance:
- Fiscal policy needs to focus on containing the rise in public debt and building buffers against potential shocks.
- Recommended actions include reducing the high wage bill, improving the quality of expenditure, and strengthening tax administration.
- Some Directors noted that the primary expenditure ceiling could usefully be accompanied by a debt ceiling.
- Monetary and reserve policy:
- Commended the South African Reserve Bank’s effective inflation targeting and its intention to lower inflation toward the midpoint of the official target band.
- Monetary policy should remain cautious, paying attention to fiscal policy and upside inflation risks.
- Advised opportunistically increasing international reserves to enhance resilience.
- Financial sector oversight and inclusion:
- Welcomed the introduction of the Twin Peaks approach to strengthen financial sector oversight and cross-agency coordination.
- Took positive note of the banking system remaining sound but stressed continued vigilance.
- Recommended continuing to upgrade stress-testing capabilities and efforts to enhance financial inclusion, including promoting entry of new financial institutions and technological solutions to increase competition.
Selected economic indicators and key statistics (2014–19, as presented)
- Social and population indicators:
- Nominal GDP (2016, billions of US dollars): 295
- GDP per capita (2016, in US dollars): 5,311
- Total population (2016, million): 55.6
- Urban population (2014, percent of total): 64
- Life expectancy at birth (2016, number of years): 62
- Headcount ratio at $1.90 a day (2011 PPP): 16.6
- Undernourishment (2015): 5.0
- Gini coefficient (2010): 63.4
- Income shares: Highest 10 percent of population: 51.3; Lowest 20 percent of population: 2.5
- Economic performance (selected annual figures):
- Real GDP: 2014: 1.8; 2015: 1.3; 2016: 0.6; 2017: 1.5; 2018 (Est.): 1.7; 2019 (Proj.): [value listed as blank in source]
- Real GDP per Capita: 0.3; -0.3; -1.0; -0.1; 0.1 (years corresponding to 2014–2018)
- CPI (annual average): 2014: 6.1; 2015: 4.6; 2016: 6.3; 2017: [not listed in table average but elsewhere cited as 5.3]
- Unemployment Rate (percent of labor force, annual average): 25.1; 25.4; 26.7; 27.5; 27.9; 28.3 (2014–2019 sequence)
- Savings, investment, and fiscal metrics:
- Gross national saving (percent of GDP): 15.4; 16.4; 16.1; 15.6; [2018–19 values listed in table as 15.1 and 14.8]
- Investment (including inventories, percent of GDP): 20.5; 21.0; 19.4; 18.6; 18.5; 18.7
- Revenue, including grants (percent of GDP): 27.6; 28.1; 28.6; 29.0; 29.5; [2019 value listed as blank]
- Expenditure and net lending (percent of GDP): 31.9; 32.9; 32.7; 33.3; 33.6
- Overall balance (percent of GDP): -4.3; -4.8; -4.1; -4.6; -4.0
- Primary balance (percent of GDP): -1.2; -1.5; -0.6; -0.5; 0.0
- Structural balance (percent of potential GDP): -3.8; -3.9; -3.7; -3.5
- Gross government debt (percent of GDP): 47.0; 49.3; 51.6; 53.0; 55.0; 56.0
- Government bond yield (10-year, percent): 8.0; 9.7; 8.9; 9.2; 8.6
- External sector and reserves:
- Current account balance (billions of U.S. dollars): -17.8; -14.6; -8.2; -8.6; -11.0; -12.7
- Current account balance (percent of GDP): -5.1; -2.8; -2.5; -2.9; -3.3
- Gross reserves (billions of U.S. dollars): 49.1; 45.8; 47.4; 50.7; 51.5
- Total external debt (percent of GDP): 41.3; 39.1; 48.3; 49.6; 46.1
- Nominal effective exchange rate (period average): -10.2; -11.9; -7.1; 12.7 (years and context as in source)
- Exchange rate (Rand/U.S. dollar, end-period): 11.6; 13.7 (dates as in source)
- Sources for indicators: South African Reserve Bank, National Treasury, Haver, Bloomberg, L.P., World Bank, and Fund staff estimates and projections.
IMF Press Release No. 18/319 — July 30, 2018
