wage growth above inflation. The 2015/16 SOUTH AFRICA budget deficit was 3.9% of GDP. Defend- Recent developments ing its investment-grade credit rating, new revenue measures and expenditure cuts South Africa’s economy grew by 1.3% in were introduced in the 2016/17 budget. 2015, 0.5p.p. below population growth, Two-thirds of the fiscal adjustment will Table 1 2015 making it the second consecutive year of come from taxes, largely from fuel and sin Population, million 55.0 falling GDP per capita. Mining recovered levies and excises as well as only limited GDP, c urrent US$ billion 313.7 from prolonged strikes in 2014, but decel- relief from ‘fiscal drag’. The budget deficit GDP per c apita, c urrent US$ 5709 erated markedly through 2015 due to tum- is expected to fall to 2.4% of GDP in Poverty rate ($1.9/day 2011PPP terms) a 15.5 bling global demand (and prices) for com- 2018/19, and net public debt to stabilize at a modities. Agriculture was hit by the worst 46.2% of GDP in 2017/18, two years earlier Poverty rate ($3.1/day 2011PPP terms) 33.4 drought in a century. This has plunged at than previously expected (gross debt is Gini Coeffic ient a 63.4 least an estimated 50,000 South Africans expected to peak at 51% of GDP in b Sc hool enrollment, primary (% gross) 101.6 into poverty. Manufacturing sector perfor- 2017/18). b Life Expec tanc y at birth, years 56.1 mance has been mixed, somewhat sup- In addition to the mining rebound after Sources: World Bank WDI and M acro Poverty Outlook. ported by a maintenance-related rebound several strikes, manufacturing exports— Notes: in steel and stronger automotive exports. such as automotives—benefited from (a) M ost recent value (2010) (b) M ost recent WDI value (2013) Structural constraints, including rigid strengthening global demand. Although labor and goods markets, skills mismatch- the drought put pressure on (food) im- es, and barely sufficient electricity provi- ports, this supported a narrowing of the sion limit the economy’s ability to re- current account deficit. The rand depreci- balance from commodities to manufactur- ated by 30% against the US dollar. This ing and services. In addition, policy uncer- helped cushion the effect of falling com- Real GDP per capita has been falling in tainty is increasingly undermining invest- modity prices on the current account— South Africa since 2014—aggravated ment—in 2015 this ranged from new legis- however, it also limited tailwinds from most recently by drought—which has lation affecting investor rights, uncertain- falling oil prices. Imported inflation— raised poverty levels. Growth is not ex- ty on continued access to AGOA, more aggravated by the drought—largely ex- pected to exceed population growth until stringent rules for tourist visas, and ab- plains the breach of the 6% upper inflation rupt cabinet reshuffles. Finance and busi- target (since January 2016), leading the 2018. Weak commodity prices continue ness services continue to be the remaining South African Reserve Bank to raise inter- to put pressure on exports, the exchange engine of growth in South Africa. est rates most recently in January and rate and in turn inflation, while structur- Although tax revenue grew by 8.5% in March 2016, by a cumulative 75bp to 7%. al constraints including rigid labor and 2015/16, partly supported by new revenue Poverty has fallen over the past decade, measures including higher marginal per- however the revised national poverty goods markets, hamper adjustments to sonal income tax rates, the weaker-than- lines leave 36.9% (close to 20 million seize the opportunities from the real effec- expected economy resulted in collection people) below the national lower bound tive depreciation of the rand. shortfalls, especially in income taxes and of R501 per month. Extreme poverty, VAT. Expenditure growth was propelled based on the international poverty line by a three-year wage agreement raising of $1.9 per day (PPP, 2011), is expected FIGURE 1 South Africa / Commodity prices, including for FIGURE 2 South Africa / Per capita growth and poverty major South African exports, have tumbled reduction decelerate Commodity price index Poverty Rate (%) GDP per capita (USD PPP) 1 = 2012 Q1 50 12,500 1.2 45 40 12,000 1.0 35 30 11,500 0.8 25 20 11,000 0.6 15 GOLD Platinum 10 10,500 0.4 5 Oil (Brent) 0 10,000 0.2 2005 2007 2009 2011 2013 2015 2017 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 $1.9/day PPP $3.1/day PPP GDP per capita PPP Notes: Major exports: gold, platinum; major import: oil. Sources: World Bank (see notes to table 2). Sources: World Bank, World Development Indicators. MPO 272 Apr 16 to remain almost unchanged falling household indebtedness. Public service tertiary sectors. Little improvement is ex- slightly from 15.5% in 2010 to 15.0% wages will drive consumption growth. pected in the measure of shared prosperi- (close to 8.0 million people) in 2015. The Investors worry about policy uncertainty ty: growth in consumption of the poorest Gini coefficient of 63.4 makes South Afri- and potential downgrade of FX- 40% of South Africans is flat, but there is ca one of the world’s most unequal denominated foreign debt to sub- some increase at the top of the income countries in the world. investment grade, while monetary policy distribution. South Africa’s high unemployment ham- normalization in advanced economies re- pers progress in poverty reduction. Unem- duces global liquidity which has spurred ployment was 24.5% in Q4 after briefly reaching 26.4% in Q1 2015, the highest investment in emerging markets in the past. Mining production will contract Risks and challenges since the early 2000s. The number of unem- while manufacturing firms and service ployed grew by 5.3% y/y in the first three providers barely expand production. As less can be expected from global de- quarters, outpacing growth of the labor Effects of the 2015 drought on planting mand, the onus lies on policymakers to force of 4.1% y/y, leaving 5.4 million South will last at least through 2016. Given the spur growth. Making the economy more Africans unemployed in Q3 2015. Youth government’s target of debt stabilization nimble to help it rebalance toward the and unskilled workers have particular diffi- and objective to defend its credit rating, non-mineral sectors holds the key to fu- culty finding work. Discouragement is a little impetus can be expected from the ture growth and poverty reduction. South driver of low labor force participation. national budget. GDP per capita growth is Africa’s economy will need to restructure, expected to turn positive again in 2018, as and carefully managing labor relations in global growth rebounds and the economy the process will be vital to secure the re- Outlook slowly adjusts to seize new opportunities. Given the weak growth prospects, espe- quired investment. Strong efforts to main- tain the integrity of South Africa’s institu- cially in the primary sectors, little progress tions, a major selling point to investors, Growth has been revised downward from is expected in reducing poverty and ine- and to increase investor confidence the last forecast, estimated at 0.8% in 2016 quality. Since the majority of the extreme through greater certainty in policymaking and 1.1% in 2017 before rebounding to poor depend on social grants for their too will be vital for the return of invest- 2.0% in 2018. Weaker-than-expected global income, the growth of these transfers has ment and growth. While fiscal consolida- demand, deteriorating investor sentiment the largest effect on the pace of extreme tion forms part of the policy mix to de- and consumer confidence, and a sluggish poverty alleviation. Inequality is expected fend South Africa’s investment grade adjustment to the real effective deprecia- to increase by 1.3% between 2010/11 and credit rating, ambitious structural reform tion are the main reasons for the down- 2017/18, largely due to the impact of the will be required to lift South Africa’s ward revisions. Consumers will remain widening gap between those with and weak growth prospects and accelerate constrained by high unemployment and without jobs, and between primary and poverty reduction. TABLE 2 South Africa / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 e 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 2.2 1.5 1.3 0.8 1.1 2.0 Private Consumption 2.9 1.4 1.2 0.8 0.9 2.1 Government Consumption 3.3 1.9 0.3 1.1 1.1 1.0 Gross Fixed Capital Investment 7.6 -0.4 -0.9 -2.5 0.3 2.0 Exports, Goods and Services 4.6 2.6 8.5 2.5 2.7 3.1 Imports, Goods and Services 1.8 -0.5 6.1 0.6 1.6 2.7 Real GDP growth, at constant factor prices 2.3 1.6 1.3 0.8 1.1 2.0 Agriculture 1.5 5.6 -8.4 -4.3 1.0 3.1 Industry 1.8 -0.2 1.1 -0.3 0.4 1.2 Services 2.5 2.1 1.7 1.4 1.4 2.3 Inflation (Consumer Price Index) 5.8 6.1 4.6 6.5 6.7 6.1 Current Account Balance (% of GDP) -5.8 -5.4 -4.5 -4.4 -4.3 -4.0 Financial and Capital Account (% of GDP) 5.8 5.4 4.5 4.4 4.3 4.0 Net Foreign Direct Investment (% of GDP) 0.5 -0.3 -0.5 -0.3 -0.1 0.1 Fiscal Balance (% of GDP) -3.8 -3.6 -3.9 -3.3 -2.9 -2.4 Debt (% of GDP) 43.9 46.8 50.5 50.9 51.0 50.5 Primary Balance (% of GDP) -0.7 -0.4 -0.6 0.4 0.7 1.2 Poverty rate ($1.9/day PPP terms) a,b,c 14.9 14.9 15.0 15.0 15.1 14.9 Poverty rate ($3.1/day PPP terms) a,b,c 32.4 32.4 32.5 32.6 32.6 32.4 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: 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 co nstant P P P . MPO 273 Apr 16