government has strengthened dialogue SOUTH AFRICA with the private sector and has been care- Recent developments fully managing labor relations. South Africa’s foreign-currency denomi- 2016 may mark a turning point for South nated debt is rated one notch above ‘junk’ Africa’s slowing economy. Following a by S&P (with a negative outlook) as well Table 1 2015 contraction in the first quarter (Q1), a as by Fitch. The 2016/17 budget intro- Population, million 54.8 strong rebound in manufacturing, and duced fiscal measures to stay the consoli- GDP, c urrent US$ billion 308.1 sustained performance in commerce and dation course. Slower upward revisions to GDP per c apita, c urrent US$ 5625 finance prevented a technical recession in tax brackets, an increased fuel levy, and Poverty rate ($1.9/day 2011PPP terms) a 16.6 Q2. The decline in agricultural output is higher tobacco and alcohol tax collections a 34.7 easing, as 2015 El-Niño drought-related have supported revenues this fiscal year, Poverty rate ($3.1/day 2011PPP terms) effects begin to dissipate. And though while a new sugar ‘sin tax’—currently Gini Coeffic ient a 63.4 b mining has been contracting, momentum hotly debated—is to be introduced in Sc hool enrollment, primary (% gross) 97.6 has improved in Q2. On the demand side, April 2017. In an environment of weak b Life Expec tanc y at birth, years 56.1 recovery in industry and mining was re- economic growth, demands to loosen fis- Sources: World Bank WDI and M acro Poverty Outlook. flected in rising exports of 1.9 percent y/y cal policy are strong but the government’s Notes: in Q2, while imports contracted by 2.6 commitment to fiscal consolidation is (a) M ost recent value (2010) (b) M ost recent WDI value (2014) percent. Yet in spite of green shoots in the credible. While some future revenue economy, growth in the first six months of measures are yet to be identified, the 2016 remained at 0.3 percent, which points budget deficit is expected to ease to 2.4 to a third year of falling GDP per capita percent of GDP in FY2018/19 from 3.9 growth, estimated to raise poverty by 0.25 percent in FY2015/16, whereas the govern- For South Africa, 2016 may mark the percentage points compared to 2015. ment expects net public debt to stabilize at Investment is declining for a third quarter, 46.2 percent of GDP in 2017/18, two years trough of the business cycle, and a recov- as the end of the commodity boom—but earlier than previously anticipated. ery from 2017—although modest and also policy uncertainty surrounding ex- The rand has been depreciating, by a sub- fragile—is expected to improve the odds tractives-related legislation—discourages stantial 35 percent between December for reducing high levels of poverty, ine- mining investment. Policy uncertainty 2010 and January 2016. In spite of relative- extends into other structurally important ly rigid factor and product markets, this quality, and unemployment. As fiscal areas, including the introduction of a na- has resulted in some economic restructur- space is exhausted, and with a possible tional minimum wage, the auctioning of ing with exports, from vehicles to tourism, bond-rating downgrade to ‘junk’ status band-width spectrum to roll out broad- countering some of the weakening of do- looming, ambitious structural policies are band communications, expropriation leg- mestic demand. Yet the rand strengthened vital to support the recovery. Policy un- islation, and concern regarding opaque once more over 2016, partly supported by reshuffles of the cabinet, which all contrib- a cumulative 75 basis-point rate increase certainty is arguably the biggest risk to ute to keeping investor confidence low. by the South African Reserve Bank to limit turning the page on three years of falling Better news emerges from the energy sec- exchange rate pass-through on prices, per capita growth. tor, where load-shedding has not occurred while aiming to bring inflation back below in a year. It is also good news that the the 6 percent upper target. FIGURE 1 South Africa / Exports of goods and services and FIGURE 2 South Africa / Actual and projected poverty rates real effective exchange rate and GDP per capita (constant LCU) Index: Poverty rate Q4 2010=100 50 60,000 120 45 50,000 110 40 35 100 40,000 30 90 25 30,000 20 80 20,000 15 70 10 10,000 60 5 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q4 0 0 Exports of Goods and Services (SA, const. prices) 2005 2007 2009 2011 2013 2015 2017 Real effective exchange rate (+=appreciation) $1.9/day PPP $3.1/day PPP GDP per capita Sources: StatsSA, South African Reserve Bank, and World Bank staff calculations. Source: World Bank. MPO 270 Oct 16 As exports outgrew imports, the trade which includes discouraged workers, consumption of the poorest 40 percent of deficit narrowed and swung into balance increased to 36.3 percent, above the previ- South Africans is projected to be essential- in the middle of the year. Yet other out- ous quarter's 33.8 percent. ly flat, while there is some increase at the flows through the current account, includ- top of the income distribution. ing FDI-related dividend payments, and weaker factor income from operations of Outlook South African companies continued to keep the current account deficit at 4.2 per- Risks and challenges cent of GDP during the first half of 2016. The recovery is expected to be slow. 2016 The shortfall continues to be financed by growth has been revised down to 0.4 per- Policy uncertainty is one of the greatest volatile and unreliable capital flows. cent (from 0.8 percent in the last MPO). challenges for South Africa, as investment While South Africa made progress in re- This is consistent with heightened policy is urgently required to support the re- ducing poverty in the past decade, close to uncertainty dampening investor senti- structuring of the economy against a 36.9 percent of the population lived below ment. Private consumption remains con- weaker rand, and to raise potential output the lower bound national poverty line of strained by unemployment, high house- growth. Municipal elections in which op- R501 per month in 2011. Extreme poverty, hold indebtedness, and inflation. And belt position parties captured major South based on the international poverty line of -tightening by the government will pro- African cities are seen as a testament to $1.9 per day (PPP, 2011), was 16 percent in vide little impetus to growth. Though the South Africa’s strong institutions. Contin- 2011. Given low economic growth, esti- recent strengthening of the rand provides ued demonstration of their integrity will mated progress in poverty reduction since less of an impetus for exports, the signifi- be crucial to bring investment. Given a 2011 is limited. South Africa’s Gini coeffi- cant depreciation compared to 2011 may tight fiscal position, structural reforms, cient of 0.634 is one the highest globally. continue to foster a restructuring of the hinging on political will, can be good val- South Africa’s high and rising unemploy- economy. In addition, the recent stabiliza- ue for money and should focus on the roll- ment remains the key challenge for pov- tion of the rand has reduced imported out of broad-band networks, improve- erty reduction, averaging 25.3 percent inflationary pressures, which may serve to ments to the education system, strength- from 2000 to 2016. The unemployment reduce the central bank’s bias toward fur- ening the governance of State-Owned rate remained near 25 percent in 2015, ther tightening. This paves the way for a Enterprises and continued efforts to build and increased to 26.6 percent in Q2-2016. cautious economic rebound, to 1.1 percent bridges with organized labor. While the Construction and manufacturing, both in 2017 and 1.8 percent in 2018, as the FY2016/17 budget kept fiscal consolidation labor intensive, were hit by sluggish economy restructures, commodity prices on track, structural policies to foster growth, with quarterly employment de- rise, and electricity capacity improves. Yet growth are what will be needed to avert clines of 88,000 and 80,000, respectively. this will be insufficient to make a major downgrade of South Africa’s credit rating And the "wide" unemployment rate, dent in poverty and inequality: growth in to sub-investment grade in the near term. TABLE 2 South Africa / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 2.3 1.6 1.3 0.4 1.1 1.8 Private Consumption 2.0 0.7 1.7 0.4 0.8 1.5 Government Consumption -3.7 3.9 0.0 -0.2 0.8 1.1 Gross Fixed Capital Investment 13.8 0.1 2.3 -3.6 -1.9 1.0 Exports, Goods and Services 3.6 3.3 4.1 1.7 2.7 3.1 Imports, Goods and Services 5.0 -0.5 5.3 -1.8 -0.2 1.5 Real GDP growth, at constant factor prices 2.4 1.6 1.2 0.4 1.1 1.8 Agriculture 1.5 5.6 -8.4 0.0 1.0 3.1 Industry 1.8 -0.2 1.1 -0.3 0.4 1.2 Services 2.7 2.3 1.7 0.7 1.4 2.0 Inflation (Consumer Price Index) 5.4 6.4 4.6 6.3 6.0 5.8 Current Account Balance (% of GDP) -5.9 -5.3 -4.3 -3.5 -3.3 -3.1 Fiscal Balance (% of GDP) -3.8 -3.6 -3.9 -3.3 -3.0 -2.4 Debt (% of GDP) 43.9 46.9 50.4 50.9 51.2 50.7 Primary Balance (% of GDP) -0.6 -0.5 -0.5 0.3 0.8 1.5 Poverty rate ($1.9/day PPP terms) a,b,c 15.7 15.6 15.7 15.9 16.0 15.9 Poverty rate ($3.1/day PPP terms) a,b,c 33.6 33.6 33.6 34.1 34.1 33.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n 201 0-IES. (b) P ro jectio n using neutral distributio n (2010) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. (c) P ro jectio ns are fro m 2013 to 201 8. MPO 271 Oct 16