IMF Executive Board Concludes 2017 Article IV Consultation with South Africa

July 6, 2017

On June 26, 2017, the Executive Board of the International Monetary Fund concluded the Article IV consultation [1] with South Africa.

Living conditions have ameliorated substantially for the bulk of South Africa’s population during the past two decades, but the pace of improvement has gradually slowed. Following last year’s near-standstill in economic activity, growth is projected to increase to 1.0 percent in 2017 and 1.2 percent in 2018, still insufficient to keep pace with the rising population. The current account deficit is projected to decline to 3 percent of GDP in 2017, boosted by mining and agricultural exports, and to widen to just below 4 percent of GDP in the medium term. Consumer price inflation recently returned below 6 percent, owing in part to the easing of the drought, and is projected to remain marginally below the upper threshold of the 3-6 percent target band for the remainder of 2017 and in 2018.

South Africa’s vulnerabilities have become more pronounced and are set to increase further unless economic growth revives. Low growth has taken a toll on the state of the public finances, increasing government debt. The public sector’s balance sheet is also exposed to sizable contingent liabilities from state-owned enterprises (SOEs). Perceptions of weakening governance and uncertainties regarding the direction of future economic policies, partly related to the electoral calendar, have also adversely affected consumer and investor confidence. In the external sector, large gross external financing needs, financed mainly by portfolio flows, expose South Africa to significant financing risks. Vulnerabilities from exchange rate fluctuations are attenuated by South Africa’s track record of a freely floating exchange rate, corporate resilience to sizable exchange rate depreciation during the past few years, and high share of domestic-currency-denominated government debt. Even so, external and domestic contexts could result in significant shocks, whose implications could in turn be amplified by linkages among the real, financial, and fiscal sectors, especially if accompanied by further downgrades of local currency sovereign credit ratings to below investment grade.

Monetary and fiscal policies have been focused on keeping inflation in check and maintaining medium-term debt sustainability. The South African Reserve Bank (SARB) tightened the repo rate in stages by 75 bps in early-2016 to 7.0 percent and has kept it at that level since then. The headline fiscal deficit was reduced to 3.9 percent of GDP in FY2016/17 from 4.5 percent the previous fiscal year, and the budget for FY2017/18 envisages a further moderate tightening. The pace of reform in the labor market and in product/service markets has been insufficient to make a noticeable contribution to reviving economic growth.

Executive Board Assessment [2]

Executive Directors considered that the scope for monetary or fiscal policy to provide stimulus is limited. They noted that, with headline inflation projected marginally below the upper threshold of the target band, keeping policy rates on hold is appropriate. Directors highlighted the need for prudent fiscal policy aimed at maintaining debt sustainability while prioritizing pro‑growth and pro‑poor spending. They encouraged the authorities to strengthen budget execution and the implementation of revenue and fiscal reform measures to ensure that government debt stabilizes significantly below 60 percent of GDP. In particular, they emphasized the need to monitor and manage fiscal risks from explicit or implicit government guarantees, and the importance of reform of state‑owned enterprises.

Directors urged the authorities to accelerate the pace of reforms in product, service, and labor markets to spur economic growth and job creation, especially for young people. Reforms should focus on sectors providing crucial inputs for firms in the economy, such as power generation, telecommunications, transportation, and financial services for SMEs. In the labor market, improving educational attainment and skills will be crucial. Directors considered that wage determination should become more responsive to firm‑specific circumstances, including productivity. They noted that the recently‑agreed national minimum wage has the potential to make a material difference for large segments of the population, although its impact on employment should be carefully monitored. They urged the authorities to stand ready to introduce complementary measures to support young workers and SMEs. They also encouraged them to promote parallel initiatives to improve labor relations, including implementation of a code of good practice in collective bargaining. Strengthening governance and fighting corruption will also be critical.

Directors considered that bringing to fruition ongoing reforms in the financial sector to adapt prudential regulation fully to international best practice and enhance the resolution framework would further buttress resilience. These reforms should be complemented with greater competition in the banking system. Robust implementation of the Financial Intelligence Center Amendment Act will be important to strengthen the integrity of the financial system. Directors considered that greater access to finance, combined with proper supervision, would help reduce inequality.

Directors commended South Africa’s resilience, which owes to its flexible exchange rate, low reliance on foreign currency debt, large domestic investor base, and broadly balanced international investment position. They noted that attracting more durable foreign investment and increasing international reserves would further enhance resilience.



Table 1. South Africa: Selected Economic and Social Indicators, 2012–1 7

Social Indicators

GDP

Poverty (percent of population)

Nominal GDP (2016, billions of US dollars)

295

Headcount ratio at $1.90 a day (2011 PPP) (percent of population)

16.6

GDP per capita (2016, in US dollars)

5272

Undernourishment (2015)

5.0

Population characteristics

Inequality (income shares unless otherwise specified)

Total (2016, million)

55.9

Highest 10 percent of population

51.3

Urban population (percent of total), 2014

64

Lowest 20 percent of population

2.5

Life expectancy at birth (years), 2016

62

Gini coefficient (2010)

63.4

Economic Indicators

2013

2014

2015

2016

2017

2018

Est.

Proj.

Proj.

National income and prices (annual percentage change unless otherwise indicated)

Real GDP

2.5

1.7

1.3

0.3

1.0

1.2

Real GDP per capita

0.9

0.1

-0.3

-1.3

-0.6

-0.5

Real domestic demand

3.2

0.4

1.7

-0.7

0.7

1.2

GDP deflator

6.1

5.8

5.0

6.8

5.8

5.7

CPI (annual average)

5.8

6.1

4.6

6.3

5.7

5.6

CPI (end of period)

5.4

5.3

5.3

6.7

5.6

5.5

Labor market (annual percentage change unless otherwise indicated)

Unemployment rate (percent of labor force, annual average)

24.7

25.1

25.4

26.7

27.4

28.0

Average remuneration (formal nonagricultural, nominal)

7.2

6.5

7.0

8.1

7.5

7.4

Labor productivity (formal nonagricultural)

1.9

1.3

1.9

1.9

1.9

1.9

Unit labor costs (formal nonagricultural)

5.1

5.1

5.1

6.2

5.5

5.4

Savings and Investment (percent of GDP unless otherwise indicated)

Gross national saving

15.4

15.5

16.3

16.2

16.1

15.7

Public (incl. public enterprises)

-0.9

1.1

1.1

1.0

0.9

1.0

Private

16.2

14.4

15.2

15.1

15.2

14.7

Investment (including inventories)

21.3

20.8

20.7

19.4

19.1

19.1

Public (incl. public enterprises)

7.1

7.3

7.6

7.6

7.6

7.6

Private

13.3

13.3

12.8

12.0

11.7

11.7

Fiscal position (percent of GDP unless otherwise indicated) 1/

Revenue, including grants 2/

27.3

27.6

28.3

28.9

29.1

29.4

Expenditure and net lending

31.6

31.8

32.9

32.9

33.2

33.4

Overall balance

-4.3

-4.2

-4.6

-4.0

-4.1

-4.0

Primary balance

-1.3

-1.1

-1.3

-0.5

-0.4

-0.2

Structural balance (percent of potential GDP)

-4.2

-4.0

-3.9

-3.5

-3.5

-3.3

Gross government debt 3/

44.1

47.0

49.3

51.7

52.6

54.7

Government bond yield (10-year, percent) 4/

8.2

8.0

9.7

8.9

8.7

...

Money and credit (annual percentage change unless otherwise indicated)

Broad money

5.9

7.3

10.3

6.1

6.8

6.9

Credit to the private sector

6.6

7.2

8.3

5.6

4.8

5.1

Repo rate (percent, end-period) 4/

5.0

5.8

6.3

7.0

7.0

...

3-month Treasury bill interest rate (percent) 4/

5.1

5.8

6.1

7.2

7.4

...

Balance of payments (percent of GDP unless otherwise indicated)

Current account balance (billions of U.S. dollars)

-21.6

-18.7

-14.0

-9.6

-9.6

-11.1

percent of GDP

-5.9

-5.3

-4.4

-3.3

-3.0

-3.4

Exports growth (volume)

3.6

3.2

3.9

-0.1

1.9

2.4

Imports growth (volume)

5.0

-0.5

5.4

-3.7

0.9

2.5

Terms of trade (percentage change)

-1.4

-1.6

3.4

0.3

0.3

-1.4

Overall balance

0.1

0.4

-0.2

0.9

0.0

0.0

Gross reserves (billions of U.S. dollars)

49.6

49.1

45.8

47.4

47.4

47.4

Total external debt

37.2

41.3

39.1

48.5

45.2

46.2

Nominal effective exchange rate (percentage change, period average) 5/

-14.4

-10.3

-5.6

-11.0

12.7

…

Real effective exchange rate (percentage change, period average) 6/

-10.1

-3.3

1.1

-3.7

12.9

…

Exchange rate (Rand/U.S. dollar, end-period) 7/

10.5

11.6

15.6

13.7

13.1

…

Sources: South African Reserve Bank, National Treasury, Haver, Bloomberg, World Bank, and Fund staff estimates and projections.

1/ Consolidated government as defined in the budget unless otherwise indicated.

2/ Revenue excludes the line "transactions in assets and liabilities" classified as part of revenue in budget documents. This is because this line captures proceeds from the sales of assets, realized valuation gains from holding of foreign currency deposits, and other conceptually similar items which are not classified as revenue by the IMF's Government Finance Statistics Manual 2010.

3/ Central government.

4/ Average of January-May 2017 data

5/ Percentage change January-May 2017 average with respect to 2016 average.

6/ Percentage change January-March 2017 average with respect to 2016 average.

7/ End May 2017


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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