IMF confirms SA’s toxic economic cocktail of tanking growth, low confidence

South Africa’s Finance Minister Nhlanhla Nene is figuratively once again perched atop a wobbly chair. But this time the stakes are much higher than a viral Youtube video. In an Administration where loyalty to Number One trumps competence, Nene’s management of South Africa’s national finances has attracted well deserved plaudits. But there is only so much the financial guy can do. When economic growth tanks because of poor management by the principals, tax receipts come under pressure. And when confidence plummets because of anti-business policies, it stops the virtuous circle of investment-led growth all developing countries desperately need. Let’s hope Nene is able to pull another unlikely rabbit out the hat in his Mini Budget later this month. If not, then at least enough to satisfy rating agencies which are circling like vultures. – Alec Hogg  

By Rene Vollgraaff

(Bloomberg) — If economic growth in South Africa this year is bad news, 2016 is set to be even worse, according to the International Monetary Fund.

Two weeks before Finance Minister Nhlanhla Nene publishes revised growth forecasts, the Washington-based lender cut its estimate for 2015 to 1.4 percent from 2 percent. More concerning was its projection that gross domestic product will expand just 1.3 percent next year, which would be the slowest pace since a recession in 2009.

Visitors are silhouetted against the logo of the International Monetary Fund at the main venue for the IMF and World Bank annual meeting in Tokyo October 10, 2012. REUTERS/Kim Kyung-Hoon
Visitors are silhouetted against the logo of the International Monetary Fund at the main venue for the IMF and World Bank annual meeting in Tokyo October 10, 2012. REUTERS/Kim Kyung-Hoon

China’s slump is hurting South Africa in two ways — curbing demand from its biggest trading partner and reducing revenue from platinum, iron ore and other metals that account for about half of the nation’s exports. With thousands of mining jobs threatened and an electricity shortage curbing output, business confidence is at a 22-year low.

“The IMF forecast is on the negative side, but I don’t think it’s necessarily far-fetched,” Johan Rossouw, group economist at Vunani Securities Ltd., said by phone from Cape Town. “We have an underlying problem on the demand side, a lack of confidence and everything that goes with that. But we also have a problem on the production side where we are not competitive enough and have capacity problems.”

The IMF’s projections are more pessimistic than those from the World Bank and South Africa’s central bank. The World Bank is forecasting GDP growth of 1.5 percent this year and 1.7 percent in 2016, while the Reserve Bank estimates 1.5 percent and 1.6 percent respectively.

Recession Fears

Compared to previous bouts of currency depreciation, the rand’s 13 percent slide against the dollar this year has had a relatively muted effect on exports, mainly because of weak global demand and power shortages. The rand gained as much as 0.7 percent to 13.2586 per dollar on Monday.

Recession fears are also coming to the fore. While Reserve Bank Governor Lesetja Kganyago said last week he doesn’t expect GDP to contract for a second consecutive quarter in the three months through September, manufacturing output has declined in six of the first eight months of the year. The industry makes up 13 percent of the economy.

“We hope to avoid a recession, but whether we have one or not, we’ll probably still have a situation where next year will be the third year of growth being around 1.5 percent,” Elna Moolman, an economist at Macquarie Group Ltd., said by phone from Johannesburg on Oct. 9. “That means you are not creating work and you are putting yourself in a very difficult fiscal position.”

Read also: Cees Bruggemans: SARB’s headache – China, US direct proceedings

Budget Targets

Slower growth makes Nene’s fiscal targets more difficult to achieve. He is due to publish revised estimates in his mid-term budget on Oct. 23 at a time when credit-rating companies scrutinize the nation’s finances for any slide away from fiscal tightening. Nene has pledged to narrow the budget deficit to 2.5 percent of GDP in the year through March 2018 from an estimated 3.9 percent this year.

“There’s immense pressure on the National Treasury right now, especially as we’re going into local government elections, and the global context which is much less supportive than before,” Peter Worthington, an economist at Barclays Africa Group Ltd.’s Johannesburg-based investment-banking unit, told reporters on Oct. 7.

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