South Africa: Latest Outlook Shows Urgent Need for Policy Reforms

SUMMARY

South Africa faces significant challenges and needs decisive action to revive growth, the IMF said in its latest annual assessment of the country’s economy.

 
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  • Low growth amid China slowdown and global financial volatility
  • Political wrangling increasing policy uncertainty
  • Electricity shortages easing, reforms urgently needed for growth and jobs
  • South Africa has made considerable economic and social progress since its first democratic election in 1994, but many citizens have not sufficiently benefited from the improvements. The report shows income inequality and unemployment remain among the highest in the world, and growth has waned in recent years.

    In 2015, South Africa was hit by a number of economic shocks. China’s slowdown and rebalancing, weak commodity prices, and U.S. monetary policy normalization all weighed on growth (Chart 1). On the domestic front, leadership changes at the National Treasury last December and other political developments shook confidence, heightened governance concerns, and increased policy uncertainty. A severe drought in the region also significantly reduced agricultural output.

    And while electricity supply has improved, growth continues to be held back by deep-rooted structural problems such as poor education outcomes, and product and labor markets that are out of reach for too many people.

    The report shows growth slowed to 1.3 percent in 2015, the lowest since the global financial crisis and below most emerging market economies and commodity producers. The IMF projects 2016 growth at 0.1 percent, which would mean a second year of falling per capita incomes. A muted recovery is expected from 2017, approaching 2-2½ percent in the outer years as shocks dissipate and more power plants are completed; with these projections, unemployment will likely rise over the medium term.

    Risks of further deterioration

    Downside risks dominate and stem mainly from China, heightened global financial volatility, and domestic politics and policies that may reduce confidence (Chart 2).

    Shocks could be amplified by linkages between capital flows, the sovereign, and the financial sector, especially if combined with sovereign credit rating downgrades to speculative grade. The United Kingdom’s recent decision to leave the European Union (EU) has further increased risks, as there are extensive financial linkages between the United Kingdom and South Africa and sizable trade linkages with the EU as a whole.

    The report notes, however, that the authorities are making progress in the recent dialogue between government, businesses, and labor, which could catalyze reform implementation and...

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