Any prolonged halt to capital inflows into South Africa has been highlighted as the main threat facing the country by the International Monetary Fund (IMF), which also warns that outflows could be triggered by either a global repricing of risk as unconventional monetary policies are unwound, or by any further escalation in labour market instability.

In a report arising from its Article IV Consultation with South Africa, which took place between May 22 and June 4, the IMF says a reversal in capital flows could force a disorderly adjustment of the country’s fiscal and current account deficits and even precipitate a recession. These twin deficits have hitherto been financed by global liquidity.

“South Africa’s current account deficit reflects competitiveness problems, which remain significant despite the recent depreciation [of the rand] and have contributed to a declining share of global exports,” the IMF states.

Improving terms of trade prior to 2008 masked South Africa’s weak export performance, with the IMF calculating that the 2012 current account deficit would have reached 11% of gross domestic product (GDP) had the terms of trade remained at the 2005 level.

Trade information released prior to the IMF statement showed that the cumulative trade deficit for the first eight months of the year rose to R107.3-billion compared with R69.9-billion during the same period in 2012, amid a weak export performance and rising imports.

The current account deficit widened to 6.5% of GDP in the second quarter of 2013, having climbed to 6.3% in 2012 – the deficit averaged 3.5% of GDP in the previous three years.

The report also argues that South Africa could be more exposed than other emerging markets to a reversal in capital flows, owing to its “relatively high current account deficit, risky funding mix, high share of nonresident holdings of government debt and liquid financial markets”.

Nonresidents hold about $140-billion of South Africa’s debt and equity portfolio liabilities, which represents about 40% of GDP.

The IMF also forecast continued sluggish growth for South Africa, projecting a 2% expansion in 2013, rising to 3% in 2014 and 3.5% over the medium term.

“The balance of risks is tilted firmly to the downside,” the reports avers, while calling for accelerated efforts to implement the structural reforms outlined in the National Development Plan.

The National Treasury says government is focused on domestic plans to grow the economy, having recognised that South Africa could no longer rely as heavily on the global economy to reignite growth and create job opportunities.

“Actions are being taken to improve labour relations in key sectors and administrative structures and processes are being strengthened towards improved service delivery and public accountability,” the National Treasury adds.

It also stresses that it remains committed to fiscal consolidation, but that the country’s fiscal policy remains grounded by the three principles of counter-cyclicality, debt sustainability, and inter-generational equity.