Distress in Europe Slows South Africa's Economic Recovery

  • Distress in Europe has delayed South Africa's economic recovery
  • Strong macro policies, supervision have supported stability amid low financial risks
  • Labor, product market reforms could cut unemployment, boost competitiveness
  • In its regular annual assessment of the South African economy, covering the year to July 2012, the IMF said South Africa faces the immediate challenge of conducting policy under a highly uncertain global environment and of making firm progress on reforms that promote the long-run inclusive growth needed for maintaining social cohesion.

    In its review that concluded August 1, the IMF urged further action to expand employment opportunities, secure better education and health outcomes, and build more efficient infrastructure, while maintaining macroeconomic and financial stability in a risky global environment.

    Since the IMF’s previous annual economic assessment, renewed distress in Europe—South Africa’s main trading-partner region—has delayed South Africa’s recovery. Economic output will take longer than envisaged earlier to reach potential: reflecting the global slowdown, growth is likely to fall below 3 percent in 2012, and gradually recover ground to close the negative output gap, now two years later than envisaged.

    External sources of risk include slower demand for South African exports and a further decline in commodity prices. Renewed concerns about the euro area and signs of a slowdown in China have recently tilted risks to the downside.

    Increased risks, from a low base

    Although vulnerabilities remain low, risks have increased. External debt remains moderate and about half of it is rand denominated. International reserves are currently adequate, but the expected increase in foreign liabilities warrants increasing reserve coverage over the medium term.

    Banks’ capital and liquidity cushions have stabilized at comfortable levels, and credit growth and bank profitability have started to pick up from a low base. The main risks remain banks’ dependence on domestic short-term wholesale funding and their heavy exposure to home mortgages. Broad regulatory reforms to further enhance financial sector resiliency are under way.

    Fiscal and monetary policies stance have appropriately reacted to the slowdown. They have provided further stimulus in the face of weak external demand and a negative output gap. But after four years of monetary and fiscal stimulus, the policy space to deal with adverse shocks has...

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