South Africa’s Economy Will Soon Recover – IMF

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Finance Minister Pravin Gordhan’s is putting more efforts to ensure that SA’s economy is recovering from its slowing growth are bearing fruit.

The International Monetary Fund (IMF) says that a muted South African recovery is envisaged from 2017 and ratings agency Moody’s has given the country a stay of execution on its credit rating.

On Friday, both agencies gave South Africa a morale boost, with the IMF saying the government and the Reserve Bank had taken appropriate steps to counter rising government debt and inflation and Moody’s confirming the country’s investment credit rating at Baa2, with a negative outlook.

Under control

Responding to the Moody’s announcement, the Treasury said it was bringing public finances under control, despite recent “adverse political development”. The Treasury said President Jacob Zuma’s government would “continue to demonstrate its commitment to translate plans into concrete actions that will ensure South Africa remains an investment-grade country”.

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An IMF mission team led by Laura Papi visited Pretoria, Johannesburg and Cape Town from April 18 to May 4, to conduct the 2016 Article IV Consultation discussions with South Africa. At the conclusion of the visit, Papi said the IMF projected growth at 0.6 percent and a muted recovery was envisaged from 2017.

“Risks to this outlook are tilted to the downside and include further shocks from China, heightened global financial volatility and sovereign debt credit rating downgrades. On the upside, the recent dialogue between government and social partners could catalyse reform implementation and invigorate growth.”

The IMF said the government was making welcome progress on addressing infrastructure bottlenecks, especially in the electricity sector, and had committed to state-owned enterprise reform, and was strengthening public procurement. It said a comprehensive package of structural reforms remained the preferable option to create jobs and reduce inequality.

Turning point

Meanwhile, Moody’s said the confirmation of South Africa’s ratings confirmed the agency’s view that the country was probably approaching a turning point after several years of slowing growth; that the 2016/17 budget and medium-term fiscal plan would likely stabilise and eventually reduce the general government debt metrics; and that the recent political developments, while disruptive, testified to the underlying strength of South Africa’s institutions.

The Moody’s rating is two levels above junk and comes after the agency placed South Africa on review for a downgrade in March. “The negative outlook speaks to the implementation risks associated with the structural and legislative reforms that the government, business and labour recently agreed (on) in order to restore confidence and encourage private sector investment, upon which Moody’s expectations for growth and fiscal consolidation in coming years – and hence Baa2 rating – rely.”

Fitch Ratings and S&P Global Ratings (formerly Standard & Poor’s Ratings Services), expected to review South Africa next month. Both rate the country BBB-, a notch lower than Moody’s and the lowest investment grade.

Moody’s said the first driver for the confirmation was its expectation that South Africa’s economic growth would gradually strengthen after reaching a trough this year as the various supply side shocks that had suppressed economic activity since 2014 receded. “Specifically, the electricity supply is now more reliable, the drought is ending and the number of workdays lost to strikes has shrunk significantly (a trend that planned rule changes are likely to embed further).

“In addition, the inflation outlook is more subdued, which would suggest fewer interest rate rises ahead than we expected when the Reserve Bank saw inflation heading towards 8 percent by year-end. Less severe tightening of monetary policy would… support growth.”

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