The International Monetary Fund (IMF) yesterday warned that South Africa’s public finances would deteriorate further and hurt growth prospects if the new administration failed to take bold decisions to reform the economy.
The lender, which recently concluded its visit to the country, said there was “cautious optimism” about South Africa’s economic prospects as President Cyril Ramaphosa’s new government formulates its policy agenda, but said growth would be dependent on how fast reforms are implemented.
Ana Lucía Coronel, who headed the IMF team, said if reforms were delayed, investment would fail to pick up and economic growth would remain weak in the medium term.
“The fiscal deficit is set to worsen as weak growth constrains revenue, current expenditure remains rigid, and public enterprises require additional support. As a result, debt pressures are likely to further increase in the near term,” Coronel said.
“Weak finances and operations of public enterprises, particularly Eskom, represent a major downside risk to growth and the fiscus. Without fundamental reforms in Eskom’s finances and operations, continued budget transfers or assumption of its debt by the government will not resolve the company’s issues.”
The IMF also warned the Ramaphosa administration that his investment drive will fall short should the government not implement reforms timeously.
Ramaphosa has set his sight on netting $100 billion (R1.45 trillion) in new investments over the next five years as he battles soaring unemployment that stands at 27.6 percent.
The warning comes just weeks after rating agency Moody’s said the country was fast slipping into junk status as continuing structural weaknesses and rising debt overran South Africa’s ability to service its obligations.
Moody’s flagged that Eskom, whose chief executive Phakamani Hadebe handed in his resignation last month, would remain the main source of contingent liability risk.
The challenges facing Ramaphosa were further laid bare by poor manufacturing activity data, which showed the sector’s weakness in the first quarter carried into the second quarter.
The Absa and Bureau for Economic Research’s purchasing managers index reserved the gains from April and swung to 45.4 points last month from 47.2 points in April, as new orders, business activity and inventories dropped.
May’s data was also the lowest print since October and below market expectations of a 47.5 points increase.
Capital Economics emerging markets economist Virág Fórizs said the figures were consistent with manufacturing output falling by about 5 percent year-on-year.
“In light of today’s figures, it’s hard to make an argument for a strong upturn in the second quarter, after what was probably a very poor first quarter. Data released on Tuesday are likely to show that the economy contracted in the first quarter,” Fórizs said.
“We think that gross domestic product fell by 2 percent quarter-on-quarter on a seasonally adjusted annualised basis.”
The South African Reserve Bank has already said it expected that the economy contracted in the first quarter.
The National Treasury said it was aware of the risks identified by the IMF and that work was under way to address them.
“Various measures are being finalised, including the restructuring of Eskom,” the department said.
Source: IOL
