The latest International Monetary Fund (IMF) staff report on South Africa, which was published last week following Article IV Consultations that took place between May 22 and June 4, make for unhappy reading.

Particularly startling was the warning that any prolonged halt to capital inflows into South Africa – which could be triggered either by the tapering of unconventional monetary policies abroad, or further labour market instability at home – could force a disorderly adjustment of the country’s twin deficits. Hitherto, South Africa’s fiscal and current account deficits have been financed easily by strong capital inflows.

The report suggests that South Africa is more exposed than other emerging markets to a reversal in capital flows, owing to its “relatively high current account deficit, risky funding mix, high share of nonresident holdings of government debt and liquid financial markets”. Nonresidents hold about $140-billion of South Africa’s debt and equity portfolio liabilities, which represents about 40% of gross domestic product (GDP).

“South Africa’s current account deficit reflects competitiveness problems, which remain significant despite the recent depreciation [of the rand] and have contributed to a declining share of global exports,” the IMF states.

It also notes that improving terms of trade prior to 2008 had masked South Africa’s weak export performance, with the IMF calculating that the 2012 current account deficit would have reached 11% of GDP had the terms of trade remained at the 2005 level.

Trade information released prior to the IMF statement showed that the cumulative trade deficit for the first eight months of the year rose to R107.3-billion, compared with R69.9-billion during the same period in 2012, amid a weak export performance and rising imports.

The current account deficit widened to 6.5% of GDP in the second quarter of 2013, having climbed to 6.3% in 2012 – the deficit averaged 3.5% of GDP in the previous three years.

The IMF forecasts continued sluggish growth for South Africa, projecting a 2% expansion in 2013, rising to 3% in 2014 and 3.5% over the medium term. “The balance of risks is tilted firmly to the downside,” the reports avers, while calling for accelerated efforts to implement the structural reforms outlined in the National Development Plan.

The National Treasury stresses that it is focused on domestic plans to grow the economy and that action is being taken to improve labour relations in key sectors. It also emphasises that it remains committed to fiscal consolidation, but that the country’s fiscal policy remains grounded by the three principles of counter-cyclicality, debt sustainability and inter- generational equity.

What is clear, though, is that South Africa needs to make some serious and long- overdue decisions about how it plans to deal with the structural problems that are making it increasingly vulnerable to both internal and external threats. Whether these will be made ahead of what is likely to be the most competitive elections since 1994 is far from guaranteed.