Avoiding South Africa’s downgrade to junk status is arguably the country’s first priority for 2016. Achieving that goal, though, is going to be extremely difficult in a context of heightened uncertainty, a precarious fiscal balance and the rapid deterioration in South Africa’s growth outlook.
As the World Bank pointed out last week, South Africa faces a “not insignificant” risk of slipping into recession, with the bank again slashing the country’s growth outlook to 0.8%. The revision is particularly significant, given that the bank was still forecasting growth of 1.4% in early January, itself a downward adjustment from the 2% level predicted in July.
The new number is more or less in line with the International Monetary Fund’s recent downward revision to 0.7% and the South African Reserve Bank’s expectation that the economy would expand by only 0.9% this year. For 2017, the prognosis is equally disturbing, with the bank forecasting growth of only 1.1%, as opposed to the 1.6% outlined in early January and the 2.6% of July.
“There has been a dramatic deterioration in the outlook if you look at it over a period of six or seven months, as a result of a sharper-than- expected slowdown in China, the reversal in capital flows, as well as the domestic headwinds facing South Africa,” programme leader Catriona Purfield explains.
“We also see risks to our forecast to the downside – so there is a risk that South Africa could slip into recession and it’s not an insignificant risk,” she adds.
The bank has not simulated the growth impact of a possible downgrade of South Africa to junk, but Purfield describes it as a “critical issue”. A downgrade would increase the borrowing costs of not only government, but also for companies and citizens who are in debt. A rising debt burden would, in addition, crowd out other spending in the Budget, with the interest bill having risen materially over the past few years.
“That’s why I think it is very important that we do see action in this Budget to help address the fiscal constraints.”
But what sort of action is being sought?
Purfield says the bank will be looking for action on the spending side. “Action to tackle high levels of the wage bill, action to improve the effectiveness and efficiency of spending . . . and action to tackle the finances of State-owned enterprises, which impose a huge contingent risk on the fiscus.”
The challenge for Finance Minister Pravin Gordhan, who is scheduled to deliver his Budget address on February 24, will be to implement those changes in a “growth friendly way” by preserving infrastructure spending and the social grants, which bank research has shown to have helped in alleviating poverty and reducing inequality.
“Squaring this circle of low growth and tight fiscal constraints points again to the message that we have: South Africa has to do more outside the fiscal envelope to help alleviate its growth constraints,” Purfield asserts.
However, it requires “very difficult reforms” that address the long-term constraints to growth, such as improving power supplies and the labour environment, reducing input costs and port charges, while cutting red tap, boosting skills levels and improving access to broadband infrastructure.