The International Monetary Fund (IMF) has highlighted the prospect of protracted economic policy uncertainty, together with a continued deterioration in perceptions over the quality of governance, as key risks to South Africa’s growth outlook.

The IMF still expects South Africa to grow by 1% in 2017, despite the fact that the country descended into its first recession since 2009 in the first few months of 2017. It expects the economy to expand by 1.2% in 2018.

In a statement following the conclusion of the 2017 Article IV consultation with South Africa, the IMF said low investment and consumer confidence in South Africa were associated with rising uncertainty regarding the direction of economic policies, as well as perceptions of weakening governance, including control of corruption.

The fund’s statement was published only a day after the conclusion of a tense African National Congress (ANC) policy conference at which delegates grappled over the definition of ‘radical economic transformation’, which has emerged as a key theme for the governing party.

In the process, the ANC delegates raised the prospect of changing the Constitution to accelerate land reform without compensation and indicated a preference for the nationalisation of the South African Reserve Bank, but without changing its mandate or independence. The conference also debated various other proposals for de-racialising and de-concentrating ownership in the economy.

“The electoral calendar has heightened perceived uncertainty regarding future economic policies,” the IMF stated, noting the public discourse on radical economic transformation and the March Cabinet reshuffle, which led the rand to depreciate by 8% within a few days.

“The remainder of this year may bring increased competition among candidates for election in December to the presidency of the ANC – the party with an absolute parliamentary majority since 1994,” it added.

Fiscal risks from lower economic growth and South Africa’s State-owned enterprises (SOEs) were also described as “sizable”, while the room for a policy response to further adverse shocks was “limited”.

“If growth turned out one percentage point lower than in the baseline, on average, during 2018 to 2022, the debt ratio would reach a level 14 percentage points of gross domestic product (GDP) higher than in the baseline by the end of the projection period. Accommodating a shock of such magnitude would likely lead to significantly higher financing costs, perhaps accompanied by a local currency debt downgrade to below-investment grade.”

The IMF also cautioned that a sizable rise in the debt ratio could also stem from the realisation of contingent liabilities, or recapitalisations of SOEs. Contingent liabilities were estimated at 18% of GDP at the end of March
2017, with more than half related to SOEs.

The IMF, therefore, argued that SOE reforms were needed to reduce their cost to the Budget, manage fiscal risks from contingent liabilities, and increase efficiency in the economy.

It listed potential directions for reform as including: comprehensive stocktaking and review of the SOEs and their subsidiaries, with information on their commercial viability and the relevance of their objectives from a public policy perspective; stricter vetting processes for establishing new SOEs and, especially, their subsidiaries, in view of their large existing stock; inclusion of costs incurred by the SOEs for public service delivery in the government budget; and stricter enforcement, with sanctions, for breaches of the Public Financial Management Act.

The fund concluded that structural reforms were urgently needed to reignite growth and render it more inclusive.

“In product and service markets, such as power generation, telecommunications, and transportation, fostering entry by new firms would reduce costs for a wide range of businesses, supporting an increase in output as well as job creation. In the labor market, there is a need for wage setting to become more reflective of firm-specific circumstances.”

The IMF said the introduction of the national minimum wage could help millions of employees, but that its impact on jobs should be monitored and government should stand ready to take complementary measures to support small firms or youth.

“In the financial sector, ongoing reforms to the prudential and resolution framework should be brought to fruition. Greater financial inclusion is needed to provide affordable credit to small firms and low-income households.”