The number of unemployed workers in- SOUTH AFRICA creased by 11 percent in 2016, elevating Recent developments the unemployment rate to 26.5 percent of the economically active population. Em- GDP growth registered just 0.3 percent in ployment declines were reflected in min- 2016, marking a fifth consecutive year of ing, trade, community and social services Table 1 2016 slowing momentum. Investment contract- as well as manufacturing. Youth (aged 15 Population, million 55.7 ed by 3.9 percent, the main contributor to to 34) remain vulnerable with an unem- GDP, c urrent US$ billion 289.4 weak actual and potential growth, as ployment rate of 37.1 percent. Against this GDP per c apita, c urrent US$ 5195 structural constraints and policy uncer- background, poverty rates measured at Poverty rate ($1.9/day 2011PPP terms) a 16.6 tainties diminished investor confidence. the international poverty lines of $1.9-and Poverty rate ($3.1/day 2011PPP terms) a 34.7 South Africa is lagging its emerging mar- $3.1 a day are estimated at 16.0 and 34.1 ket peers with weak FDI and portfolio percent respectively in 2016, up from 15.7 Gini Coeffic ient a 63.4 b inflows. Rising unemployment and falling and 33.7 percent in 2015. The Gini coeffi- Sc hool enrollment, primary (% gross) 98.5 real earnings contributed to weaken pri- cient is estimated to have remained un- b Life Expec tanc y at birth, years 56.7 vate consumption, easing from gains of changed at 63.4, making South Africa the Source:World Bank WDI and M acro Poverty Outlook 1.7 percent in 2015 to 0.8 percent in 2016. most unequal country in the world. To Notes: Government consumption, while limited tackle high levels of poverty and inequali- (a) M ost recent value (2010) (b) M ost recent WDI value (2014) by fiscal consolidation, improved from ty the government announced a national growth of 0.5 percent to 2.0 percent in minimum wage of ZAR20 per hour, to be 2016. And a sluggish global recovery ad- phased in by May 2018. Inflation, especial- versely affected trade, as export and im- ly escalation of food prices to double -digit The South African economy remained stuck ports contracted for the first time since gains, put pressure on the poor through in low gear during 2016, with GDP grow- 2009, at -0.1 and -3.7 percent, respectively. 2016. A decelerating trend, as drought ing just 0.3 percent. The outlook is particu- On the supply side, services continued to be effects dissipate, promises relief for con- the main driver for growth. Agricultural sumers, especially the poor. Although still larly uncertain following the recent down- production showed signs of strengthening above the South African Reserve Bank’s grade of sovereign debt to sub-investment in the fourth quarter of 2016, the first year- target band (3-6 percent), the expected grade by S&P and Fitch. In the baseline on-year gain since the onset of the El-Nino easing of inflation allowed the Monetary forecast, growth is weaker compared with drought in the first quarter of 2015. The in- Policy Committee to keep interest rates the previously anticipated recovery of the dustrial sectors also contracted in 2016, unchanged during their latest meeting in mainly due to a fall in mining output. Weak- March 2017, following hikes of a cumula- economy, which renders the challenge of er output lowered demand for electricity. tive 75 basis points during 2016. tackling high unemployment, and reducing This combined with new capacity helped The 2017 Budget, tabled in February, an- poverty and inequality even more pressing. avert the chronic electricity shortages that nounced new revenue measures in the face Accelerating the implementation of South have plagued the economy since 2007. of projections for sluggish growth and de- With a third consecutive year of falling clining tax buoyancy. These included tried Africa’s National Development Plan while GDP per capita, South Africa’s ‘triple and tested measures like fiscal drag (raising enhancing fiscal sustainability will be criti- challenge’ of high unemployment, pov- tax brackets by less than inflation), increas- cal to reestablish a stronger path for growth. erty and inequality remains stubborn. ing the fuel levy, and sin taxes (alcohol and FIGURE 1 South Africa / GDP growth forecasts: commodity FIGURE 2 South Africa / Actual and projected poverty rates exporters and importers and GDP per capita 6% Poverty rate (%) GDP per capita (constant LCU) 50 57000 5% 45 56000 40 55000 4% 54000 35 53000 3% 30 52000 25 51000 2% 20 50000 15 49000 1% 10 48000 0% 5 47000 2016 2017 2018 2016 2017 2018 0 46000 2005 2007 2009 2011 2013 2015 2017 2019 Commodity exporters Commodity importers South Africa $1.9/day PPP $3.1/day PPP GDP pc Sources: Global Economic Prospects and World Bank staff estimates. Sources: World Bank (see notes to table 2). MPO 268 Apr 17 tobacco, increases of 6 to 8 percent, with a concerning its long-term impact. While a sustainability, and eventually regaining a ‘sugar tax’ likely to be implemented later in more favorable external environment and solid credit position, will continue to be key. the year). The top personal income tax rate better agricultural performance favor is to be raised from 41-to 45 percent; and growth in 2017, higher borrowing costs the dividend withholding tax rate is to be increased from 15-to 20 percent. and increased uncertainty will work to mute growth. In the baseline forecast GDP Risks and challenges On March 30, 2017, a cabinet reshuffle is projected to grow around 0.6 percent in changed the political leadership at the Na- 2017. Higher borrowing costs—and likely Outturns could prove weaker or stronger tional Treasury, which was interpreted by weaker consumer and business confi- than in the baseline forecast, depending on markets and rating agencies as undermining dence—would weigh on both investment the longer-term impacts of the downgrade governance and the quality of institutions. and private consumption, and effects from and policy reactions to it. Policy uncertain- Overnight, 10-year Treasury bond yields rose the markdown are likely to persist through ty and political instability remain arguably by 40 basis points and the rand lost 5 percent, the projection period. Growth for 2018 is the largest risks to growth in South Africa, as capital fled the country. Standard and now anticipated at 1.1 percent, with 2019 dampening both investor and consumer Poor’s downgraded South Africa on April 3, growth to register 2.0 percent. If realized, confidence. The depreciation of the rand 2017 to sub-investment grade--and Fitch such an outturn would imply falling per will contribute to higher prices — includ- followed suit on April 7. It is yet to be seen capita incomes in 2017 and further raise ing food prices —constituting bad news for how this will affect execution of the 2017 poverty. Partly as a result, South Africa is the poor, for whom food is an important Budget. However, slower growth would expected to lag recovery in other commod- expenditure. Higher inflation is also likely require additional fiscal effort beyond the ity exporters, where growth should gain to keep monetary policy tighter than had consolidation foreseen in the 2017 Budget, momentum from modestly rising com- been anticipated. Continuing global chal- and this could jeopardize the government’s, modity prices (figure 1). Overall, the slow lenges include policy uncertainty in ad- objective of stabilizing public debt-to-GDP growth is expected to stymie poverty re- vanced economies, potential trade frictions over the next 3 years as laid out in its October duction, with poverty rates projected to and the risk of financial market disruption. 2017 Medium Term Policy Statement. remain roughly constant between 2015 and To address the challenges of low growth 2019 (15.7 percent at $1.9/day PPP and 33.7 and weak confidence the most pressing percent $3.1 day PPP by 2019, figure 2). reforms include: (i) accelerated implemen- Outlook Against this background, it will remain vital for the country to make progress on tation of ongoing public and private infra- structure projects; (ii) investing in basic the implementation of the National Devel- and tertiary education; (iii) promoting Prospects for the economy are unusually opment Plan in order to achieve South competition and SME growth, and (iv) uncertain given the recent nature of the Africa’s Vision 2030: to eliminate poverty increasing the flexibility and efficiency of ratings downgrades and lack of clarity and reduce inequality. Safeguarding fiscal factor markets. TABLE 2 South Africa / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 1.7 1.3 0.3 0.6 1.1 2.0 Private Consumption 0.7 1.7 0.8 1.0 0.8 2.0 Government Consumption 1.1 0.5 2.0 0.9 1.1 1.0 Gross Fixed Capital Investment 1.7 2.3 -3.9 -3.0 0.5 0.9 Exports, Goods and Services 3.2 3.9 -0.1 2.0 2.8 3.2 Imports, Goods and Services -0.5 5.4 -3.7 0.8 1.8 2.0 Real GDP growth, at constant factor prices 1.8 1.3 0.4 0.6 1.1 2.0 Agriculture 6.9 -6.1 -7.8 1.8 2.1 2.4 Industry 0.1 1.1 -1.3 0.5 1.4 1.6 Services 2.3 1.6 1.3 0.5 0.9 2.1 Inflation (Consumer Price Index) 6.4 4.6 6.3 6.2 5.8 5.6 Current Account Balance (% of GDP) -5.3 -4.4 -3.3 -3.3 -3.1 -2.9 Financial and Capital Account (% of GDP) 6.5 5.1 3.6 3.3 3.1 2.9 Net Foreign Direct Investment (% of GDP) -0.5 -1.3 -0.4 -1.5 -0.5 -0.1 Fiscal Balance (% of GDP) -3.6 -3.7 -3.5 -3.5 -3.2 -2.9 Debt (% of GDP) 46.6 49.5 50.5 53.3 54.4 54.5 Primary Balance (% of GDP) -0.4 -0.4 0.0 0.4 0.9 1.1 Poverty rate ($1.9/day PPP terms) a,b,c 15.6 15.7 16.0 16.0 15.9 15.7 Poverty rate ($3.1/day PPP terms) a,b,c 33.6 33.7 34.1 34.2 34.1 33.7 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) No wcast: 201 4 - 2016. Fo recast are fro m 201 7 to 2019. MPO 269 Apr 17