With cap in hand: SA’s slippery slope to IMF aid
Experts cite state capture as likely tipping point
LAST week Finance Minister Malusi Gigaba visited Washington to cast a positive light on South Africa’s economy amid political tension back home.
Gigaba’s trip to the IMF/ World Bank spring meetings, which got under way last week and were interspersed with investor engagements and a meeting with Moody’s, happened when several African economies are charting difficult waters, some turning to the IMF for aid.
Take Ghana, the poster child for the Africa rising narrative three years ago until a plunging currency, rising inflation and double-digit fiscal deficit — as its spending exceeded its revenue — forced it to seek a $918-million IMF loan.
Mozambique, Malawi, Tanzania, Kenya, Burundi and Sierra Leone are among about 20 African countries that are on IMF aid.
In January, Nigeria was reportedly in discussions with the IMF, among other lenders, for emergency assistance. The next month it said it would rather pursue its own economic reform plan.
South Africa may be in a stronger position than some of its peers, but the question is whether in the medium to longer term the country may find itself begging at the IMF’s door.
In 1993 the government was close to bankruptcy and, according to reports, took an $850-million loan from the IMF that former president Nelson Mandela apparently facilitated. An offer in 1996 by the IMF for a loan was scuppered by the ANC.
The country had been in the throes of its longest recession, which had started in 1988 following a decline in investment by parastatals three years earlier and a lack of consumer and business confidence. It ended in 1993. GDP had been in decline for three decades.
The situation was dire with the current account slipping into a deficit in mid-1988.
To protect foreign exchange reserves and dampen inflation, interest rates were hiked.
Inflation was around 15% for a decade to 1991. A year later, the fiscal deficit touched 8.6% of GDP. By the end of September 1993, gross foreign exchange reserves were sufficient to pay for only one month of imports.
The IMF generally lends to countries on affordable terms to meet international payments for imports and debt, while maintaining adequate reserves, when they lack funds. It lends through various loan instruments, some with zero interest rates for lowincome countries.
But such lending is often seen as undermining a government’s sovereignty.
David Hedley, chief economist for Africa and the Middle East at the Institute of International Finance, said this week: “Governments are often reluctant to take out an IMF programme and loan because of the conditionality. There used to be a stigma associated with having to go to the IMF because it looked as if the government had failed in their economic policy and they needed the help and expertise of an outside agency. It doesn’t look good politically.”
Hedley said such countries reached unstable fiscal deficits, sometimes with double digits, because these governments were often subsidising either food or petroleum prices and the liability on the government was higher.
Often the IMF arrangement would require these subsidies to be stopped.
“If policymakers feel it’s not in the interests of the country, they won’t accept that loan. Sometimes the IMF medicine is hard to swallow domestically and socially,” he added.
Jabu Mabuza, chairman of Business Leadership South Africa and president of Business Unity South Africa, last week cautioned that if economic growth shrunk (due to ratings downgrades) the country might have to approach the IMF. “There is a growing risk that the country will have to beg for a bail-out . . . and obey the policy ‘advice’ attached to such support.”
National Treasury DirectorGeneral Lungisa Fuzile told Business Times ahead of the trip to Washington that the government had not yet reached the stage where it had to consider borrowing from the IMF or other lenders.
“We would hope we are far [from borrowing from the IMF].”
The IMF will send a team to South Africa next month to mon- itor the country’s economic health. “It is usually very thorough. One can liken it to someone holding a mirror so that you can see yourself through its reflection. Sometimes the report would say things we don’t necessarily like, but we always take it in good spirit,” Fuzile said.
The visit will coincide with a difficult time for South Africa following credit rating downgrades of the government’s foreign and local currency debt to junk.
“There might be good grounds to view external vulnerability as being elevated since the last report,” he said.
Fuzile added that if assumptions for slower growth after the downgrades materialised this year, this posed a risk for fiscal targets set by government in February. These included cutting the government’s debt ratio to under 50% of GDP.
Hedley argued that while political jostling ahead of the ANC elective conference this year will “get very noisy”, raising volatility in financial markets, “I don’t think there’ll be a fiscal blowout or anything dramatic like that.”
He said: “The government has said they are going to be sticking to the expenditure ceiling and there’s no reason not to believe that.
“As far as I understand, they’ll basically stick to Pravin Gordhan’s fiscal policy.”
But contingent liabilities relating to struggling state-owned enterprises may raise government debt and make investors nervous.
“Then there’s the nuclear programme.” The expensive nuclear build is criticised and thought to be linked to corruption.
Hedley argued that South Africa was not nearly in such a dire situation “as some people fear”.
He said: “The fiscal deficit is on the right path and declining, the government debt is stabilising, the balance of payments has improved, growth is picking up.”
Nedbank economist Isaac Matshego said South Africa was still far from a situation where it would need an IMF loan, “but we could get there very quickly depending on what happens to the management of government finances and economic policy.
“This whole thing about state capture is what worries us and there could be a shift towards profligate spending, basically spending which is just unaffordable for the government.”
The government’s borrowing requirements are projected to amount to R243-billion for the 2018 financial year, according to the 2017 budget.
This week the country continued to benefit from positive sentiment towards risky assets by investors seeking higher yields, leading to a rally of the rand to pre-downgrade levels of just over R13 to the dollar.
Novare economic strategist Tumisho Grater said there was still some buying of government bonds but investors might lose interest if South Africa was downgraded further.
Sometimes the IMF medicine is hard to swallow domestically and socially As I understand, they’ll basically stick to Pravin Gordhan’s fiscal policy