of GDP for 2017 it still remains a source SOUTH AFRICA of external vulnerability. This is not Recent developments least because its financing—mostly by portfolio flows—remains vulnerable to South Africa emerged from a technical quickly shifting global capital flows. recession in Q2 2017, mostly driven by International reserves remain below the Table 1 2016 agriculture, which recovered from an IMF’s recommended reserves adequacy P o pulatio n, millio n 55.8 historical drought (figure 1). Mining measures. GDP , current US$ billio n 294.8 also supported growth in the first half Fiscal policy remains on a path of con- GDP per capita, current US$ 5287 of 2017. Finance, real estate, and busi- solidation with adjustments of tax a ness services, the traditional engine of brackets below inflation and higher fuel Internatio nal po verty rate ($ 1.9) 18.8 Lo wer middle-inco me po verty rate ($ 3.2) a 37.5 growth in South Africa also picked up levies and sin taxes. Yet, revenue collec- Upper middle-inco me po verty rate ($ 5.5) a 57.0 again in Q2. The 1.1 percent y/y in- tions in the early months of the fiscal a 63.0 crease in the first half of the year is un- year (since April) have disappointed; Gini co efficient b likely to be sustained, however. Busi- and risks to achieving the debt stabiliza- Scho o l enro llment, primary (% gro ss) 99.7 b ness and consumer confidence remain tion goal resulted in downgrades of Life expectancy at birth, years 57.2 low and the purchasing manufacturers South Africa’s credit rating to sub - Source: WDI, M acro Poverty Outlook, and official data. index continues to point to pessimism investment grade by Standard and Notes: (a) Based on the recent LCS survey (2014/15), 2011 PPPs. in industry. Investment remains sub- Poors and Fitch in April 2017, raising (b) M ost recent WDI value (2014) dued, with excess capacity in the manu- borrowing costs to the government. facturing sector mostly due to a lack of The soft economic environment dampens demand. Although a depreciated rand job opportunities as unemployment in- and accelerating global growth present creased to 27.7 percent (6.2 million unem- opportunities to tap global demand, ployed) the first half of 2017. Youth un- non -commodity exports barely increase, employment is a growing concern as 55.9 Poverty has fallen significantly since de- with the exception of the automotive percent of those between 15 -24 years (1.6 mocracy in 1994, but this trend reversed sector. Consumer spending grows million) are unemployed. Including dis- between 2011 and 2015. The economy has roughly in line with population growth. couraged workers, this increases to more been growing too slowly since the global It has been supported by falling infla- than two in every three youths (67.4 per- tion and may benefit further from cent - 2.5 million people) without a job financial crisis to create jobs for poor somewhat looser monetary policy, as and an overall unemployment rate of South Africans. In 2017, the economy is the hiking cycle has come to an end in 36.6 percent (9.3 million people unem- expected to contract on a per capita basis July 2017 with a 25 basis point reduc- ployed). The newly published results of for a third year in a row. Fiscal space is tion in the policy rate. the 2014/15 Living Conditions Survey limited as South Africa lost its invest- The trade balance has been improving, suggested a significant increase in pov- partly due to improving terms of trade, erty in the recent years. Between 2011 ment grade status earlier in the year. with a moderately stronger rand and and 2015 the economic slowdown and Decisive structural reforms are needed rising commodity prices. This has also unemployment challenge have pushed to continue social progress. helped narrow the current account defi- close to 2 million people into extreme cit. However, at a projected 2.6 percent poverty measured by $1.9 a day. FIGURE 1 South Africa / Sectoral value added: agriculture FIGURE 2 South Africa / Actual and projected poverty rates and mining (seasonally adjusted annualized rate, 2015 Q1=100) and GDP per capita 105 Poverty rate (%) GDP per capita (constant LCU) Agriculture Mining 80 58000 70 100 56000 60 54000 50 95 40 52000 30 50000 20 90 48000 10 0 46000 85 2005 2007 2009 2011 2013 2015 2017 2019 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 International poverty rate Lower middle-income pov. rate Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Upper middle-income pov. rate GDP pc Sources: StatsSA and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 276 Oct 17 pick up slowly with domestic demand. maintain the debt stabilization target Outlook Improving terms of trade due to a recov- ery in commodity prices are expected to would further undermine growth. The 2019 elections are likely to raise political counter import pressure with an only pressures on the budget—as well as poli- While global growth is strengthening, the moderately increasing current account cy uncertainty which has become a major South African economy risks lagging be- deficit. Some fiscal slippage is expected constraint for investors. hind. The World Bank continues to project given revenue collections in 2017 and the A strengthening global economy poses 2017 growth at 0.6 percent—which would continued weak growth outlook. opportunities for a small open economy mean a third year of falling growth in Forecasts suggest an increase in poverty in like South Africa but structural con- GDP per capita. Only a modest rebound is South Africa. Poverty rates measured at straints keep the country from seizing expected in 2018 and 2019 at 1.1 percent the international poverty lines of $1.9 and them. While the reliability of electricity and 1.7 percent, respectively. Base effects $3.2 a day are projected at 19.5 percent has improved markedly, concerns are from agriculture are expected to disappear and 38.3 percent in 2017, up from 19.3 mounting about significant upward ad- toward the end of 2017. Most of the re- percent and 38.0 percent in 2016, respec- justment in electricity tariffs, and the reli- bound is expected to be due to an im- tively. The negative trend is expected to ability of electricity in the future depends provement in commodity prices and continue in 2018 reaching 19.6 percent and on greater policy certainty by independ- strengthening balance sheets of house- 38.4 percent respectively. ent power producers. Logistical and tele- holds from easing inflation and looser communications costs are high and lack monetary policy. A national minimum of competition, especially in upstream wage is going to be introduced in 2018 which may raise consumption among low- Risks and challenges sectors, keeps domestic input costs high. Some progress is being made in education er income households—although this may but the majority of South Africa’s labor be partly offset by job losses. Investment is Given economic performance in the first force remains unskilled—resulting in expected to remain soft in light of height- half of the year, downside risks to the both unemployment and high skills ened policy uncertainty, e.g. around a new outlook have somewhat dissipated for premia in South Africa’s modern econo- Mining Charter and land property rights. 2017. Further downgrades by credit rat- my. In a constrained fiscal environment, Automotives are expected to provide sup- ing agencies, especially Moody’s which decisive steps to address some of these port to exports in 2018 and 2019 but be- still rates South African debt as invest- structural constraints are vital. They can yond this, exports are expected to grow ment grade, remain a risk which is likely also help raise investor confidence, cru- modestly given the economy’s structural to hinge on credible proposals to counter cial to bring back much needed invest- constraints to seizing opportunities from revenue shortfalls in the Medium Term ment in South Africa, required to expand the global economy and a still competitive Budget Policy Statement in October. On productive capacity and generate jobs, exchange rate. Imports are expected to the other hand, stepping up fiscal effort to especially for South Africa’s poor. 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 1.7 Private Consumption 0.7 1.7 0.8 1.0 1.9 2.0 Government Consumption 1.1 0.5 2.0 -0.2 0.3 0.5 Gross Fixed Capital Investment 1.7 2.3 -3.9 -1.2 1.6 2.3 Exports, Goods and Services 3.2 3.9 -0.1 0.4 2.4 1.7 Imports, Goods and Services -0.5 5.4 -3.7 2.1 1.7 1.9 Real GDP growth, at constant factor prices 1.8 1.2 0.4 0.6 1.1 1.7 Agriculture 6.9 -6.1 -7.8 15.0 5.8 2.4 Industry 0.1 1.1 -1.3 0.2 1.1 1.6 Services 2.4 1.6 1.4 0.3 0.9 1.7 Inflation (Consumer Price Index) 6.4 4.6 6.3 5.7 5.8 5.9 Current Account Balance (% of GDP) -5.3 -4.4 -3.3 -2.6 -2.7 -2.8 Financial and Capital Account (% of GDP) 6.5 5.2 2.9 2.0 1.8 1.6 Net Foreign Direct Investment (% of GDP) -0.5 -1.3 -0.4 -1.4 -0.5 -0.1 Fiscal Balance (% of GDP) -4.3 -4.1 -3.9 -3.8 -3.7 -3.5 Debt (% of GDP) 46.6 49.4 50.7 52.7 53.8 53.4 Primary Balance (% of GDP) -1.3 -1.0 -0.5 -0.4 -0.2 0.1 International poverty rate ($1.9 in 2011 PPP) a,b 18.8 18.9 19.3 19.5 19.6 19.5 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 37.5 37.6 38.0 38.3 38.4 38.2 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 57.0 57.1 57.6 57.7 57.8 57.7 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty and Equity Glo bal P ractice. No tes: f = fo recast. (a) Calculatio ns based o n 201 4/15-LCS. A ctual data: 201 4/15. No wcast: 2015 - 2016. Fo recast are fro m 2017 to 2019. (b) P ro jectio n using neutral distributio n (2014) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 277 Oct 17