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Somewhere between the International Monetary Fund’s (IMF’s) bleak forecast and the South African government’s rosier outlook sits the truth of what lies ahead for the economy.
Should we care more about what the IMF – rather than our own Treasury – says about South Africa?
The sad answer, currently, is yes. Because, barring a miracle, SA’s anticipated downgrade to junk at the end of the year will likely eventually result in an IMF bailout, which essentially allows it to influence the country’s macroeconomic policy.
It is therefore worth noting that the IMF, in its latest review of the economy, forecasts growth this year of just 0.1% – down from its January forecast of 0.7% – and that it has stated an urgent need for decisive action and policy reforms to create growth and jobs.
On a number of occasions in its report, the IMF indicates that South African authorities have a more positive view and rosier outlook than the IMF.
Minister of finance Pravin Gordhan is forecasting growth of 0.9%, which seems optimistic considering the 1.2% contraction in the first quarter of 2016.
“I think they [the IMF] have gone overboard with downgrading the growth forecast,” says Azar Jammine, director and chief economist at Econometrix. He says the IMF report is based on information that is “a little behind the curve”.
“We have had data recently which is quite positive and I am reasonably optimistic we may have turned the corner.”
This includes the recent data on manufacturing, mining and electricity production, wholesale and retail sales as well as the purchasing managers’ index. He adds that the IMF had underestimated the extent of the impact of the drought, which has dampened economic activity, but is hopefully over.
Pan-African Investment & Research chief executive Iraj Abedian, however, says that “in terms of the facts on the ground, the IMF is closer to the truth of the matter. SA Inc has gotten used to believing its own ‘talk’ even though there is little action following the talk or the plans.”
The problems
The country’s inability to grow remains at the core of its problems. Growth slowed to 1.3% in 2015, the lowest since the global financial crisis and below most emerging-market economies and commodity producers, the IMF says, and it projects 2016 growth at 0.1%, and only a muted recovery from 2017, with unemployment likely to rise over the medium term.
Political wrangling and increasing policy uncertainty are major themes of the IMF report. It says the events in December around the ousting of finance minister Nhlanhla Nene and other political developments shook confidence, heightened governance concerns and increased policy uncertainty.
Economic growth is being held back by “deep-rooted structural problems such as poor education outcomes, and product and labor markets that are out of reach for too many people”.
It says that since the further weakening of the economy in the first quarter, “South Africa’s still large current account deficit (4.3% of GDP), financed by non-FDI [foreign direct investment] inflows, and gross financing needs (19% of GDP), and sizeable gross external liabilities (139% of GDP, among the highest in emerging markets) remain a significant vulnerability.”
The IMF points out that SA has one of the largest current account deficits among emerging markets, financed by non-FDI flows.
Rising government debt, coupled with low growth, sizeable contingent liabilities from financially weak state-owned enterprises (SOEs) reliant on government guarantees, and spending pressures, “triggered an increase of vulnerabilities in the real and fiscal sectors”, and sovereign downgrades could trigger capital outflows.
The fiscal outlook is subject to significant risks: weaker growth and commodity prices, greater support for SOEs, and higher borrowing costs, it says, and warns that the new nuclear power plants could pose considerable fiscal risks.
The IMF says the economy is vulnerable to China’s growth, which is slowing and now matters more for SA than the growth of the EU and the US.
While the Budget envisaged significant deficit reduction to stabilise debt, targets could be difficult to achieve on the low growth forecast.
And of course, one of the biggest concerns is SA’s income inequality and unemployment, which remain among the highest in the world.
This is a shortened version of the cover story that originally appeared in the 28 July edition of finweek. Buy and download the magazine here.
