IMF warning: economy badly exposed to shocks

The IMF warned SA on Thursday that its economy was extremely vulnerable to external shocks and funding shortfalls, although it stuck to its earlier growth forecast for the country of 1% for 2017.

In an executive report following a country visit in the last week of June, the IMF also said policy uncertainty linked to political turbulence would weigh on business and consumer confidence.

SA’s economy entered recession in the first quarter and is suffering from an unemployment rate of close to 28%.

Bitter divisions in the ANC as the contest to replace President Jacob Zuma intensifies, have also raised investor fears that policy to revive growth would take a back seat.

“Following last year’s near standstill in economic activity, growth is projected to increase to 1% in 2017 and 1.2% in 2018, still insufficient to keep pace with the rising population,” the IMF said.

Investor confidence has been depressed by political uncertainty following the axing of finance minister Pravin Gordhan in March and subsequent credit downgrades to subinvestment.

It has also been rattled by worries about the South African Reserve Bank’s future independence and by plans for the redistribution of land.

GDP contracted 0.7% in the first quarter after contracting 0.3% in the fourth quarter of 2016, dragging the economy into its first recession in nearly a decade.

“External and domestic contexts could result in significant shocks … especially if accompanied by further downgrades of local currency sovereign credit ratings to below investment grade,” the IMF said.

On government debt, the fund said: “Low growth has taken a toll on the state of the public finances, increasing government debt.”

The government’s balance sheet was also exposed to sizeable contingent liabilities from state-owned enterprises.

Finance Minister Malusi Gigaba, under pressure to detail plans to turn the economy around and avoid credit downgrades deeper into junk, said last week SA might be forced to seek outside financial assistance if the economy kept sinking.

This week, he announced a R2.3bn bail-out of state-owned South African Airways, one of a clutch of state-owned enterprises heavily dependent on government guarantees totalling nearly R500bn, about a third of total state expenditure. There is another request from the ailing state broadcaster, the SABC, still to consider.

The IMF placed the burden of economic growth squarely in the Treasury’s court in the midst of hotly contested debate about the mandate of the Bank and whether it should be responsible for socioeconomic wellbeing.

Public Protector Busisiwe Mkhwebane recently directed Parliament to initiate proceedings to amend the Reserve Bank’s constitutional mandate in a report on an apartheid-era lifeline granted to Bankorp, which was subsequently acquired by Absa.

The Bank, Absa, Gigaba and Parliament are all going to court to have that decision set aside.

Uncertainty about the direction of future economic policies in the run-up to the ANC’s December national elective conference had also hurt consumer and investor confidence, the IMF said.

“Public discourse in the runup to the 2019 presidential elections is increasingly focusing on ‘radical economic transformation,’ including more rapid transfer of economic resources to the black majority and other disadvantaged groups.

“The remainder of this year may bring increased competition among candidates for election in December to the presidency of the ANC.

“Low investment and consumer confidence have been associated with rising uncertainty regarding the direction of policies as well as perceptions of weakening governance.”

The IMF’s executive directors found that the scope for monetary policy — the preserve

of the Bank – or the Treasury’s fiscal policy to stimulate the economy was limited.

The Bank’s decision to keep interest rates on hold at 7% was appropriate, given that headline inflation was projected at marginally below the upper threshold of the Bank’s target band of 3% to 6%.

“Directors highlighted the need for prudent fiscal policy aimed at maintaining debt sustainability, while prioritising progrowth and pro-poor spending,” the IMF said.

“They encouraged the authorities to strengthen budget execution and the implementation of revenue and fiscal reform measures to ensure that government debt stabilises significantly below 60% of GDP,” the fund said.

“In particular, they emphasised the need to monitor and manage fiscal risks from explicit or implicit government guarantees, and the importance of reform of state-owned enterprises,” it said.