This is the third brief in a five part series and it considers the role of the state: public finance and fiscal policy, monetary policy and state-owned enterprises.

The first two briefs in this series considered internal constraints and external constraints on growth.  This brief considers the role of the state: public finance and fiscal policy, monetary policy and state-owned enterprises.


Public finance


The 2016 Budget envisages that, over the medium term, the government’s debt-to-GDP ratio will stabilise by 2017/18.  The IMF doesn’t believe it, arguing that the sharp fiscal adjustment could reduce growth by as much as 1.5%.  It sees the ratio rising from 49.8% in 2015 to 54% in 2021.

The IMF uses a ratio of 70% as a bench mark, beyond which an emerging market country is regarded as being at high risk of default to commercial or official creditors, in need of debt restructuring and rescheduling, or IMF financing.  The baseline projection is below the bench mark, but there are risks which could take the ratio close to, or above, the bench mark.  The risks are summarized below, along with their effect on the government debt-to-GDP ratio in 2021.



     Ratio in 2021

No fiscal consolidation


One standard deviation decline in growth


A macro-fiscal shock, combining shocks to growth, interest rates, the primary budget balance and the exchange rate


A permanent reduction in growth to the 2016 level


Realisation of 75% of government guarantees of loans



The IMF has carried out a simulation exercise based on the historical volatility of macro-fiscal variables and concludes that there is a 10% chance that the debt-to-GDP ratio would exceed 67.5% in 2021.  The debt sustainability analysis concludes that South Africa’s debt remains sustainable, risks to the fiscal outlook are rising.  Over the long term the IMF believes that it would be desirable to reduce the ratio to 40% to leave space for future shocks.


The IMF also proposes the following:


1. Laying the groundwork for targeted expenditure cuts, including to the government wage bill, which protect social grants and investment.

2. What it tactfully calls ‘strengthened procurement processes and performance budgeting’, suggesting that an e-Tender portal, central supplier database and mandatory use of centrally-negotiated contracts would improve the efficiency and effectiveness of government spending.

3. If the need for fiscal consolidation is substantial, raising consumption taxes (VAT and excise taxes) towards the emerging markets average.


Monetary policy

The IMF recommends that monetary policy be placed on hold for now, arguing that the output gap (the gap between potential growth and actual growth) is wide, dampening demand side pressure on inflation.  The pass through of currency depreciation into domestic prices is expected to remain at the 20% level.  Growing unemployment should moderate unit labour costs.  The impact of the Reserve Bank’s rate hikes are still filtering through and financial regulatory changes will tighten conditions further.


Right now, the IMF is slightly more dovish than the government on both fiscal and monetary policy in accordance with its lower growth rate projections.

State owned enterprises

The IMF points out that SOEs contribute more than 8% to GDP and they are expected to account for 39% of public infrastructure build in the next three years.  However, profitability and leverage worsened in the sector as a whole between 2011/12 and 2014/15 as the following table indicates.


                                          2011/12                2014/15

                                                         Per cent


Net profit margin                  11.1                        3.7

Return on equity                    9.9                        2.8

Return on assets                    3.2                        0.9

Debt to equity                      141.0                   152.6


Reasonable shocks to borrowing costs and earnings could undermine SOEs’ ability to service debt and require government intervention.  PetroSA, South African Airways and the Post Office are loss making, and Eskom, SAA, SANRAL rely on government guarantees which have risen from R 177 billion in 2007/08 to R 553 billion in 2015/16.


 The IMF supports the government’s commitment that support to SOEs be budget neutral, and conditional on sound business plans, improved governance and operational efficiency.  It also points to the importance of transparency surrounding board appointments and stronger accountability.  And its final recommendation is worth quoting in full:


Greater private participation – e.g allowing private competition in some sectors, partial stock market listings, or management contracts to run certain parts of SOEs’ operations – and effective regulators could help improve efficiency and service delivery and free up resources for SOEs’ investments. Clear mandates for very SOE that quantify costs and address potential conflicts between commercial and developmental activity would facilitate benchmarking performance and contribute to greater accountability.



‘Bring out number, weight and measure in a year of dearth’, wrote William Blake.  Precision, quantification, cost-benefit analysis, vale for money, concentration on a manageable set of goals, performance assessment – in a word, modernization of public administration – are needed now.  It has been possible to install them in some parts of the state.  They should be spread everywhere.



Charles Simkins
Head of Research