Delay reform, and SA is bound to lose out
Two big themes emerged from the IMF spring meetings in Washington last week. First, countries’ economic fortunes are diverging as the developed world recovers faster from the pandemic and pulls further ahead. This fuels the second theme: the risk of an emerging markets debt crisis as global inflation and interest rates rise in response to the growth rebound, drawing capital away from vulnerable countries.
So, the good news is that the global economy is recovering faster than expected; the bad news (for SA) is that the developed world is pulling ahead on faster vaccine readiness and bigger stimulus programmes. These divergent recovery paths are widening the gaps in living standards between countries. According to the IMF, the average annual loss in per capita GDP over the 2020-2024 period is projected to be 2.3% in advanced economies but double that (4.7%) in emerging markets.
Developing countries face slower recoveries and more economic scarring as their more limited stimulus packages dry up. In addition, they must now grapple with a huge debt hangover just as global interest rates are on the rise. Though capital outflows from SA have so far remained limited, the fear is that this process could accelerate in a replay of the 2013 taper tantrum should the US Federal Reserve be forced to raise interest rates faster than expected.
So far, rising global yields have also caused emerging market local currency bond the yields yield to rise on SA in’ s tandem. 10-year From mid-February to mid-March, government bond climbed roughly 100 basis points to 9.83%, in lockstep with rising US treasuries, raising the cost of government borrowing at a time when SA can least afford it.
Though the IMF accepts that unprecedented global fiscal support has prevented a more severe global economic recession, it has also raised government deficits and debt to unprecedented levels across all country income groups.
Public debt reached 97% of GDP in 2020 on average worldwide (and about 80% in SA). The IMF expects fiscal deficits to shrink in most countries in 2021 as pandemicrelated support expires or winds down, revenues recover and fiscal adjustments resume.
This should allow the global public debt ratio to stabilise at about 99% of GDP in 2021. However, SA’s debt ratio is not expected to stabilise until 2025 (at 89% of GDP) and then only if the government tightens fiscal policy dramatically.
For a country such as SA, which mounted limited fiscal stimulus in response to the pandemic and is battling to scale up its vaccine drive, the question is how to balance the risks from large and mounting government debt with the need to keep supporting the country’s nascent economic recovery.
Everyone seems to agree that the longer the pandemic lasts, the larger the challenge will be for public finances. The IMF thus recommends that countries pump up efforts to improve the production and distribution of Covid-19 vaccines before they begin the gradual process of repairing their balance sheets.
At the same time, the fund would also like to see a synchronised, green, public investment push to encourage greener and higher-tech growth to produce a more sustainable global recovery. It notes that countries like SA with less fiscal space are in danger of missing out on this opportunity to seed a green, digital recovery. Failure to get on board this train would further widen the gap between the developed and developing world.
Fortunately, many of the structural reforms SA needs to undertake to raise the growth rate are already in this vein, and need not cost an arm and a leg. They mostly require political will and regulatory changes to enable the private sector to play a greater role in (renewable) energy and economic infrastructure, especially in the critical network industries.
In short, while SA cannot avoid harsh expenditure cuts if it is to achieve fiscal sustainability by 2025, this must be coupled with structural reforms to raise the growth rate. If not, SA will be reduced to a mere spectator as the global recovery unfolds.