IMF highlights high cost of policy procrastination

A recent IMF report provides sobering reflection on the state of the South African economy. It forecasts economic growth this year of just 0.1%, rising to 1.1% in 2017 and 2%2.5% annually thereafter.

Feeble growth will worsen our already high level of unemployment. The need for swift policy changes to ensure better outcomes is urgent, especially as the IMF warns growth could be even worse than forecast.

The current combination of weakening Chinese growth and expected higher US interest rates is very unfavourable for us. This is because our economic performance is now more closely linked to growth in China than elsewhere, while funding our unusually high external deficit makes SA vulnerable to changes in US financial markets. This is worsened, says the IMF, by "domestic politics and policies that are perceived to harm confidence", and the threatened downgrade of our sovereign credit rating to "junk".

One consequence of these unfavourable circumstances has been the substantial weakening of the rand exchange rate in recent years. A weaker rand makes our goods cheaper on global markets, yet exports have failed to grow to take advantage of this. The report examines the reasons for this. It concludes that domestic policy uncertainty and constrained electricity supply have outweighed the benefits of the weaker exchange rate, and SA's global competitiveness actually worsened as a result.

The report also highlights the precar- ious financial position of our state-owned enterprises. It notes that the SOEs are core to our economic performance because they provide the infrastructure on which the private sector depends. Further negative shocks to their earnings or borrowing costs could leave them unable to service their debt.

Such an outcome would demand government bailouts, derailing government's ability to reduce its own deficit and cap national debt.

The report then turns to the effect of a possible downgrade of our credit rating. The key is the extent of foreign ownership of major financial instruments. Foreign ownership of rand-denominated government bonds equates to 12.5% of GDP and that of equities is a further 45% of GDP. The IMF estimates a downgrade could trigger large foreign sales of both, driving up interest rates and weakening asset values with further blows to economic activity.

The report also notes the vulnerability of the financial sector to capital outflows. This places at risk the banks' ability to lend, further weakening growth and government's finances.

While there is nothing we can do about the unfavourable global environment, SA can tackle the structural domestic factors harming our economic performance. So, the IMF recommends "a comprehensive package of structural reforms" as the preferred policy to increase growth, create jobs and lower inequality. Such reforms include improved infrastructure, increased competition, more jobfriendly labour markets, and improved education and training.