Introduction
Every year the IMF conducts a consultation with South Africa under Article IV of the IMF’s Articles of Agreement. The 2016 consultation has been completed and the report from it was released at the beginning of July[1]. This brief is the first of five discussing the contents of the report.
Its growth projection is the most pessimistic yet. It forecasts a growth rate of 0.1% in 2016 and 1.1% in 2017. These growth rates imply falling per capita GDP in both years, following stagnation in 2014 and a drop in 2015. Growth in 2015 was a post financial crisis low and in the bottom 20% of emerging markets. Moreover, the recovery from 2017 is expected to be feeble, with a growth rate of 2 – 2.5 per cent in the following three years, with downside risk predominating.
Why is growth so weak? The IMF view is that low commodity prices have yet to fully filter through to production and employment, the global recovery is fragile, macroeconomic policies and financial conditions are tightening and high policy uncertainty exists. The risks are both internal and external. External risks include further shocks from China and an increase in global financial volatility. Domestic risks include politics and policies harming confidence and the realization of state owned enterprises’ contingent liabilities.
The real internal economy
The second brief will deal with South Africa’s external economic relations and the third brief will consider the state and state owned enterprises. Here, six factors in the real internal economy will be considered.
1.Electricity. In 2015, electricity supply constraints are estimated to have subtracted 0.5% from growth. However, improved supply and low economic growth will see reduced load shedding in the medium term. Figure 1 shows electricity generated in South Africa since January 2008, and indicates a drop of over 5% between early 2011 and the present.
Source: Statistics South Africa, Electricity generated and available for distribution, Statistical Release P 4141, May 2016
2.The drought. Unfavourable climatic conditions have resulted in dropping agricultural production for five consecutive quarters:
Real agricultural and mining output
Percentage change at seasonally adjusted annualised rates
Agriculture Mining
2015: first quarter -11.3 12.7
second quarter -20.4 -7.8
third quarter -11.8 -10.5
fourth quarter -6.7 1.4
2016: first quarter -6.5 -18.1
Source: Reserve Bank Quarterly Bulletin, June 2016 p.4
The drought is estimated to have reduced growth in 2015 by 0.2%.
3.Sectoral interlinkages. The IMF finds significant linkages between the commodity sector and the rest of the economy, estimating that a ten per cent decrease in commodity prices would reduce real GDP growth by 0.2 per cent after two quarters, the main transmission mechanisms being changes in corporate profitability and employment in the non-mining sector.
4.The savings rate. The IMF projects the gross savings rate to drop from 16.4% of GDP in 2015 to 15.8% in 2016 and 14.9% in 2017. Two conflicting processes are projected: a small rise in savings in the public sector, occasioned by a declining budget deficit and a larger fall in private savings, resulting from declining per capita GDP and lower corporate profitability. The gap between savings and investment has to be covered by net capital inflows to the country of 4.3% of GDP in 2015, 4.1% in 2016 and 4.8% in 2017, putting South Africa in a weaker external position than is desirable.
5.The labour market. The unemployment rate rose from 24.7% in 2013 to 25.4% in 2015 and it is expected to worsen more rapidly, to 26.1% in 2016 and 26.7% in 2017. The IMF finds that, compared to its peers, South Africa’s unemployment rate responds more strongly to output downturns and less strongly to upturns. This, and the fact that earnings have grown steadily despite high unemployment rates and sluggish productivity, testify to a strong and harmful division between insiders and outsiders in the labour market. Among the insiders are public servants, with public wages standing at 184 per cent of GDP per capita, a high level among emerging markets. The report regards the public sector wage bill as bloated, and points out slowing growth in public wages will require stricter monitoring of wage and personnel decisions across all spheres of government and a reassessment of the institutional structure for public wage negotiations. In the private sector, the IMF suggests that business and labour agree on wage restraint in return for saving jobs and hiring commitments[2]. The IMF wants the proposed national minimum wage to be designed to not undermine job creation and the goal of reducing income inequality – rather more easily said than done.
6.Policy uncertainty. The IMF points out that leadership changes at the National Treasury and subsequent political developments have heightened governance concerns and increased policy uncertainty and it comments further as follows:
Lack of clarity about pending legislation that would determine modalities for property expropriation and pricing of strategic minerals, as well as implementation of B-BEEE codes in the mining sector, are examples of policy uncertainty. In addition, stricter limits on temporary contracts have reduced employment especially for the low skilled. Stricter visa requirements hurt tourism and their reversal, though partial, is welcome. Finally, the Bureau of Economic Research surveys report that more than 80 per cent of responding firms in the manufacturing sector point to the general political climate as a constraint on their business.
Additional causes for concern will be set out in the third brief on the state and state owned enterprises.
Conclusion
Many of the constraints on growth discussed in this brief have been present for a long time. The electricity crisis was more than a decade in the making. Stratification in the labour market goes back a century, though it has worsened since 1994. Gross savings as a percentage of GDP were continuously above 20% from 1959 to 1991, but have been below that level ever since. Policy uncertainty has been worse since 2009 than in either the Mandela or Mbeki administrations.
The figure below shows the discrepancy between South Africa’s growth – actual and projected – and the growth of global output.
Setting the indices of both the world and South African output at 100 at the beginning of 1981, the projected index for the world at the end of 2021 is 413, while for South Africa it is 241. The lean years of late apartheid are being echoed now. Our performance mocks our ambitions.
Charles Simkins
Head of Research
charles@hsf.org.za
[1] IMF Country Report no 16/217
[2] For wage earners, Martin Wittenberg finds that the overall pattern therefore seems to be a compression of the wage distribution at the bottom and a stretching of the distribution at the top. Martin Wittenberg, Analysis of employment, real wage, and productivity trends in South Africa since 1994, International Labour Office, Conditions of Work and Employment Series No 45, 2014
