IMF concludes its Article IV consultation with South Africa in the context of slowing market growth | Global Edition

On July 25, 2018, the Board of the International Monetary Fund concluded the Article IV consultation with South Africa.

In the midst of a marked deceleration in growth, some economic and social achievements of South Africa after the end of apartheid have recently unfolded. While the economy is globally positioned, sophisticated and diversified, gaps in physical infrastructure and education create large differences in productivity across sectors. Low consumer and business confidence dampened productivity growth.

Rapidly growing debt has limited political space. As a result, per capita growth has become negative, the poverty rate stands at around 40%, unemployment has risen to 27% – almost double for young people – and income inequality is the norm. one of the highest in the world. ] Fiscal and monetary policies have been relaxed, but growth has remained subdued. The FY 2017/18 consolidated budget deficit is estimated to have reached 4.8% of GDP compared with 4% of GDP in 2016/17.

Monetary policy eased by 50 basis points in July 2017 and March 2018 Nevertheless, GDP growth has only slightly increased from 0.6% in 2016 to 1.3% in 2017

The main obstacles to growth are a regulatory environment unfavorable to private investment, the inefficiency of state-owned enterprises that increase the cost of key inputs, market rigidities, inadequacy of product market competition, corruption and political uncertainty. Inflation is moderate at 5.3% and the current account deficit is reduced to 2.5% of GDP in 2017.

The recent political transition offers a renewed opportunity to Advance the reforms and exploit the potential of the economy. The declared priorities of the new administration – the fight against the "capture of the state" and the promotion of jobs and growth go in the right direction

On current policies, staff anticipates a modest growth to 1.5% in 2018 and 1.8% in recent years, slightly above population growth. Inflation is expected to stabilize at 4.9% in 2018 and exceed 5.5% in recent years. The current account deficit is expected to widen to 2.9 percent of GDP in 2018 and about 3½ percent of GDP in the medium term.

This reference scenario is subject to upward trends, but the downside risks seem more important. If the structural bottlenecks are resolved, South Africa has a large potential to stimulate growth, supported by deep and liquid financial markets, a strong domestic investor base , a floating exchange rate and a limited vulnerability to currency risk. and refinancing risk (long debt maturities and access to segments of the global financial safety net). However, significant vulnerabilities result from financial risks badociated with weak and mismanaged SOEs and other pressures on spending. External risks include significant gross external financing needs and a current account deficit financed by flows that are subject to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings. Disruption in trade flows and falling commodity prices would exacerbate twin deficits and slow growth.

Executive Board Assessment

Directors recognize that South Africa has made significant progress after the end of apartheid. by strong economic institutions, but observed that unemployment and inequality remain high. They welcomed the measures announced by the new administration to improve governance and boost business and consumer confidence. They encouraged the authorities to seize the opportunity offered by the recent political transition to move the reform agenda forward in a well-sequenced manner.

Directors urged the authorities to deepen the fight against corruption and advance ambitious market reforms to increase productivity and strengthen private sector participation. They recommended vigorous enforcement of the Public Financial Management Law to strengthen deterrence against corruption. Directors called for the completion of measures in the telecommunications and mining sectors to attract more private investment and create jobs. They noted that further progress is needed to contain the fiscal risks of state-owned enterprises and rethink business models, including by engaging in strategic equity partnerships with the sector. private. Directors emphasized that improved competitiveness and higher growth are essential for poverty reduction in South Africa. Improving the quality of education and the flexibility of the job market and exploiting the opportunities offered by digitization will increase efficiency and support growth.

Directors emphasize that fiscal policy must contain rising public debt and buffers against potential shocks. The reduction of the high wage bill, the improvement of the quality of expenditure and the strengthening of the tax administration would contribute to this objective and strengthen the role of fiscal policy in the fight against inequalities. Some directors have noted that the cap on primary spending could usefully accompany a debt ceiling.

Directors welcomed the effective targeting of inflation by the South African Reserve Bank and welcomed its intention to bring inflation back to the middle of the official target range. They noted that low and stable inflation would benefit the poorest households more, who tend to face the heaviest burden of high inflation. Directors stressed that monetary policy should remain cautious, paying particular attention to fiscal policy and inflationary risks.

Directors praised South Africa's resilience to recent market volatility. They advised strengthening this resilience by advancing structural reforms to attract more sustainable foreign investment and increasing international reserves opportunistically.

Directors welcomed the introduction of the Twin Peaks approach, which strengthens financial sector oversight and inter-agency coordination. They took note of the fact that the banking system remains strong, but stressed that continued vigilance will be important given the pockets of vulnerability in small and medium-sized banks. Directors welcomed the authorities' continued efforts to improve the stress testing capabilities. They recommended continuing efforts to strengthen financial inclusion, including by encouraging the entry of new financial institutions and new technological solutions, as well as by increasing competition.