The World Bank says the deterioration in South Africa’s growth outlook over the past few months has been both dramatic and rapid and warns that there is a “not insignificant” risk that the country may not even meet the bank’s revised growth forecast of 0.8% for 2016 and slip into recession.
The bank released the eighth edition of its biannual ‘South Africa Economic Update’ on Tuesday, in which the growth outlook was slashed to 0.8% from a forecast of 1.4% published in early January, which was itself a downward revision from the 2% level predicted in July.
Country director Guang Zhe Chen said the bank’s baseline remained one of positive growth for 2016, “but the number is very marginal” and was in line with the International Monetary Fund’s recent downward revision to 0.7% and the South African Reserve Bank’s expectation that the economy would expand by only 0.9% this year.
For 2017, the prognosis was equally disturbing, with the bank forecasting growth of only 1.1%, as opposed to the 1.6% outlined in early January and the 2.6% of July.
“There has been a dramatic deterioration in the outlook if you look at it over a period of six or seven months, as a result of a sharper-than-expected slowdown in China, the reversal in capital flows, as well as the domestic headwinds facing South Africa,” programme leader Catriona Purfield said.
The earlier forecasts had not catered for the recent policy uncertainty arising from the removal of Finance Minister Nhlanhla Nene in December, nor the drought, which the bank said had shaved 0.2 percentage points from 2015 growth, with some effects also being felt in 2016 as a result of a poor planting season. It also warned that the drought could push 50 000 more South Africans below the poverty line of R501 a month.
RISKS TO DOWNSIDE
“We also see risks to our forecast to the downside – so there is a risk that South Africa could slip into recession and it’s not an insignificant risk,” she added.
Chen argued that the “rapid” deterioration in the outlook called for “fundamental policy action to turn the economy around”, with the ongoing downgrades to South Africa’s growth prospects putting the goals of the National Development Plan (NDP) increasingly out of reach.
In light of the country’s poor growth performance since the launch of the NDP in August 2012, the bank calculated that the economy would need to grow by 7.2% a year from 2017 to meet the 2030 targets of more than doubling 2011 gross domestic product (GDP) – the plan itself set a yearly growth target of 5.4%.
AVOIDING JUNK STATUS
The bank had not simulated the growth impact of a possible downgrade of South Africa to ‘junk’ by the rating agencies, but Purfield described it as a “critical issue”.
“With the fiscal deficit running close to 4% of GDP, with debt close to 50% of GDP and only stabilising by 2018 and with contingent liabilities of State-owned enterprises (SoEs) the levels of debt in South Africa are high.”
A downgrade would not only increase the borrowing costs of government, but also for companies and citizens who are in debt. A rising debt burden would, in addition, crowd out other spending in the Budget, with the interest bill having risen materially over the past few years.
“That’s why I think it is very important that we do see action in this Budget to help address the fiscal constraints. I think what we would be looking for is action on the spending side – action to tackle high levels of the wage bill, action to improve the effectiveness and efficiency of spending . . . and action to tackle the finances of SoEs, which impose a huge contingent risk on the fiscus.”
The challenge for Finance Minister Pravin Gordhan, who is scheduled to deliver his Budget address on February 24, would be to implement those changes in a “growth friendly way”, by preserving infrastructure spending and the social grants, which bank research had shown to have helped in alleviating poverty and reducing inequality.
Gordhan had already indicated that he would be prioritising actions to avoid a downgrade, with promises of policy certainty and fiscal disciple made at the World Economic Forum in Davos. He also met recently with leading business personalities in an effort to canvass their views and garner their support for ways to sustain the country’s investment grade credit rating.
“Squaring this circle of low growth and tight fiscal constraints points again to the message that we have: South Africa has to do more outside the fiscal envelope to help alleviate its growth constraints,” Purfield asserted.
However, it required “very difficult reforms” that addressed the long-term constraints to growth, such as improving power supplies and the labour environment, reducing input costs and port charges, while cutting red tap and improving access to broadband infrastructure.