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South Africa: 2014 Article IV Consultation-Staff Report; Informational Annex; Debt Sustainability Analysis; Staff Statement; Press Release; and Statement by the Executive Director for South Africa
Summary:KEY ISSUES Context. South African citizens’ living standards have improved substantially in the first twenty years of democracy. But in recent years the economy has underperformed peers. The outlook is lackluster, with low growth, high unemployment, and elevated twin deficits. As in many emerging markets, weak external demand and soft commodity prices contributed to these outcomes, but deep-seated structural factors also played an important role. After years of accommodation, fiscal and monetary policies are constrained by rising vulnerabilities. With the elections over, the government has an opportunity to implement structural reforms, essential to address unemployment, poverty, and inequality. Structural reforms. An extensive public infrastructure program will ease binding electricity and transport bottlenecks over time. Besides improved state-owned enterprise efficiency, greater private sector participation would help as public balance sheets are stretched. Normalization of industrial relations, combined with greater competition in product markets, more inclusive labor markets, and reduced skill mismatches, remain indispensable to boost job-rich and sustainable growth, lower vulnerabilities, and enhance the economy’s ability to rebalance toward exports and investment. Fiscal and monetary policies. With rising vulnerabilities, macroeconomic policies are rightly factoring in the risks South Africa faces. As planned in the 2014 Medium-Term Budget Policy Statement, fiscal consolidation is needed to ensure debt stabilization over the medium term. Under staff’s baseline, further measures may be needed. The recent large drop in oil prices and the envisaged fiscal adjustment may enable the South African Reserve Bank to stay accommodative for longer. Higher interest rates may become necessary if global financial conditions tighten sharply. Policies to enhance resilience. The Financial Sector Stability Assessment (FSSA) concludes that financial sector risks are elevated but manageable. It recommends heightened scrutiny of asset quality and liquidity risks. To complement the authorities’ regulatory reform of the financial sector, the FSSA advises enhanced stress tests, group- wide supervision, a strengthened financial safety net, and a clearer allocation of responsibilities and coordination among institutions. The flexible exchange rate regime and a favorable currency composition of external debt are effective buffers against capital flow volatility, but higher reserves and policies to facilitate foreign direct investment would further strengthen resilience.
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