Higher political uncertainty in South Africa has affected investor confidence and trade exports, according to the International Monetary Fund (IMF).
The IMF’s concern came as it downgraded its growth outlook for South Africa to 0.1% for 2016 on Thursday, lower than Treasury’s 0.9% forecast.
South Africa was affected by China’s economic slowdown, weakening demand for commodities and a tightening global fiscus, Laura Papi, IMF mission chief for South Africa, explained in a podcast on Thursday.
“The reason why we’re projecting this very slow growth is that the shock from commodity prices is still reverberating throughout the economy,” she said.
“We’re seeing many firms having reduced profitability, not just in the mining sector, but in several other sectors,” she said. “And we’ve seen a lot of retrenchments unfortunately, so unemployment is actually rising.”
South Africa’s unemployment rate increased by 2.2% in the first quarter of 2016 to 26.7%. During that time, the economy shed 15 000 jobs in all sectors, except construction and community services.
Papi added that private consumption, which has been driving consumption, has been much weaker too.
Nenegate hits investor confidence
However, Papi said there were some domestic policy shocks that also contributed to the weaker forecast. “We’ve had a confluence of shocks on an already weak economy,” she said.
“The leadership changes at Treasury in December really shook investor confidence,” she said, referring to President Jacob Zuma’s decision to fire respected Finance Minister Nhlanhla Nene and then switched his replacement four days later with Pravin Gordhan after pressure from his party.
Explaining how this political uncertainty was negative for South Africa’s growth prospects, Papi referred to investor confidence and issues around trade export.
“The Bureau of Economic Research has a survey … which asks firms what are their main constraints that they are facing,” she said. “Now, more than 80% of the firms responding to this survey suggest that the general political environment is a concern.
“We looked at media reports and we constructed a measure of how frequently media reports focus on the issue of policy uncertainty. We are seeing that there is an increase in policy uncertainty, especially towards the latter part of 2015.
“It’s an issue, because it affects investor confidence (and) it makes people want to wait when they are uncertain about what’s going to happen. Investors in particular, (who) have large start-up costs, tend to wait and not invest. In fact, we’ve seen very weak private investment for some time in South Africa.
“Some work we have done also shows that this high policy uncertainty has a negative impact on exports.”
Nine-point plan to the rescue
The Treasury responded to the report on Thursday, highlighting government’s much talked-about nine-point plan that would focus on implementing structural reforms.
“We recognise, as articulated in the IMF report, that a comprehensive package of structural reforms is necessary to increase growth, create jobs and lower income inequality,” the Treasury said in a statement.
“These (nine-point plan) programmes are further supported by government collaboration with the private sector through various work-streams to boost economic growth,” it said.
“These interactions are already bearing fruit, for example the creation of a SMMEs venture fund, which provides start-ups with access to funding as well as mentoring by seasoned business leaders.
“In the longer-term, South Africa will benefit further from a solid foundation of a strong institutional framework, which promotes accountability and transparency as well as prudent fiscal and monetary policies.
“As a country, we will use these positive developments and the contributions of partners such as the IMF to work even harder together to move South Africa forward.”
Source: Fin24\Business Tech