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IMF highlights SA’s persistent competitiveness problems as growth outlook is cut

11th December 2014

By: Terence Creamer

Creamer Media Editor

  

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The International Monetary Fund (IMF), which expects the South African economy to grow by only 2.1% in 2015, warns that even this “lackluster” outlook carries considerable downside risks, with the country’s high current account deficit “reflecting persistent competitiveness problems, soft terms of trade, supply bottlenecks and subdued external demand”.

The fund’s distressing, albeit unsurprising, assessment is contained in the Staff Report on the 2014 Article IV Consultation, which was released on Thursday, December 11.

The 2.1% gross domestic product (GDP) growth outlook for 2015 also represented a further downward revision from the 2.3% forecast by the IMF in the October World Economic Outlook (WEO).

The 1.4% growth expectation for 2014, meanwhile, was in line with the WEO, but below the 2.3% forecast earlier in the year and well below the 5%-plus being targeted in the National Development Plan (NDP).

The IMF said that, although weak trading-partners growth contributed to the slowing of the economy in recent years, “binding structural constraints”, such as protracted strikes and electricity shortages, have been increasingly important factors.

Electricity utility Eskom implemented a series of power cuts in November and December and has indicated that the supply-side will remain constrained for at least 18 months and possibly longer, with the Medupi and Kusile power stations running well behinds schedule and over budget.

The modest recovery in the GDP for 2015 was based on an assumption that industrial relations would improve, with protracted strikes in the platinum and engineering sectors in 2014 having drained both the performance of the economy and investor confidence. However, electricity shortages and power cuts could weight on the economy in 2015.

“Slowly easing infrastructure constraints and stronger external demand are expected to raise growth to 2.75% in 2016–19 but not enough to lower unemployment significantly,” the IMF warned.

It also noted that, despite a 26% real effective exchange rate depreciation since 2010, the current account deficit remained high, at 5.8% of GDP in 2013.

While the deficit was expected to fall moderately over the medium term, the IMF highlighted that South Africa’s exports had remained subdued, with exports from firms with higher electricity intensity, greater product market concentration, or labour market rigidities having responded less to the depreciation.

“The exchange rate adjustment alone is unlikely to bring about the required external rebalancing. With structurally-low savings, largely due to high unemployment and easier access to credit, the current account deficit is likely to remain elevated, unless structural constraints ease or tighter financing conditions force a sharp import compression.”

The report warns that the risks “are tilted to the downside” and that a sharp surge in global financial market volatility could lead to capital flow reversals and trigger a disorderly adjustment in the current account deficit. “Lower global growth and commodity prices, further delays in relieving electricity constraints, and more labour market disruptions are additional key risks.”

On South Africa’s fiscal deficit, the staff report argued that the consolidation announced in the 2014 Medium-Term Budget Policy Statement were “significant, but may not be sufficient to stabilise debt over the medium term”.

It stressed that containing the public-sector wage bill and raising taxes would be “essential”, but that further adjustments might be necessary to stabilise debt over the medium term.

In light of the risks facing the outlook and the reduced policy space available to government, the IMF directors called for decisive structural reforms to unblock supply-side constraints, lift growth, and rebalance the economy towards exports and investments.

The ongoing infrastructure projects were welcomed along with moves to encourage greater private sector participation and promote small business.

But the IMF also recommended that high priority be given to enhancing productivity and competitiveness by accelerating product and labour market reforms, reducing skills mismatches, and normalising industrial relations.

Edited by Creamer Media Reporter

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