IMF / SOUTH AFRICA

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A new IMF report said South Africa can celebrate significant progress in its first 20 years of democracy, but faces the challenge of reviving a weak economy and addressing elevated vulnerabilities; adding in structural reforms are essential to boosting sustainable, inclusive growth and job creation. IMF / RECENT
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STORY: IMF / SOUTH AFRICA
TRT: 2:15
SOURCE: IMF / RECENT
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS

DATELINE: 11 DECEMBER 2014, WASHINGTON, DC / RECENT

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Shotlist

RECENT – SOUTH AFRICA

1 Wide shot, trains
2. Wide shot, people walking on the street

11 DECEMBER 2014, WASHINGTON, DC

3. SOUNDBITE (English) Laura Papi, Assistant Director, African Department, IMF:
“Some of the most recent data points have been quite encouraging, signaling a recovery from the slides earlier in the year. However we do still see the growth is still subdued, and we are projecting 1.4% of growth this year and 2.1 for next year.”
4. Chart
5. SOUNDBITE (English) Laura Papi, Assistant Director, African Department, IMF:
“We think that at the moment there are some structural impediments that are holding back growth and jobs. One key issue is increasing energy availability, also improving industrial relations, and accelerating implementation of some of the reforms in the National Development Plan.”

RECENT – SOUTH AFRICA

6. Wide shot, people walking on the street
7. Med shot, construction workers
8. Wide shot, construction site and crane moving

11 DECEMBER 2014, WASHINGTON, DC

9. SOUNDBITE (English) Laura Papi, Assistant Director, African Department, IMF:
“In addition to the structural reforms, we basically agree with a lot of what the authorities are doing. The medium-term budget policy statement which came out in October steered the fiscal policy in the right direction. South African Reserve Bank has also done a good job managing inflation.”
10. Various charts
RECENT – SOUTH AFRICA

11. Wide shot, people standing at store entrance
12. Wide shot, pan right, people walking on commercial area

11 DECEMBER 2014, WASHINGTON, DC

13. SOUNDBITE (English) Laura Papi, Assistant Director, African Department, IMF:
“This year is the 20th anniversary of the first democratic election in South Africa. And South Africa has really come a long way since then. Its citizens’ standards of living have improved dramatically. Access to health and education also has improved significantly. The big challenge still is unemployment. Still about a quarter of South African citizens are without a job. To address unemployment, some of the key issues are structural issues we discussed a minute ago, are very much the relevant ones. The good news as Minister of Finance said, these are factors that are within the government’s power to fix.”

RECENT – SOUTH AFRICA

14. Wide shot, construction workers on highway and traffic

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Storyline

South Africa can celebrate significant progress in its first 20 years of democracy, but faces the challenge of reviving a weak economy and addressing elevated vulnerabilities the IMF said in its 2014 review of the country.

As the government’s Twenty Year Review notes, South Africa “has emerged from its deeply divided and violent past into a peaceful, robust, and vibrant democracy that has made major strides in improving the lives of its citizens.” Income levels have increased, access to education and health care has improved, and strong institutions and policy frameworks have delivered macroeconomic stability.

Yet the country faces difficult challenges. Laura Papi, Assistant Director of the IMF’s African Department, says “some of the most recent data points have been quite encouraging, signaling a recovery from the slides earlier in the year. However we do still see the growth is still subdued, and we are projecting 1.4% of growth this year and 2.1 for next year.” About a quarter of South Africans and half of its youth remain unemployed.

The current account and fiscal deficits are elevated relative to other emerging markets. Going forward, the consumption-driven growth model of the past few years is unlikely to be sustainable and headwinds stem from tighter global financial conditions, the uneven global recovery, reduced policy space, and softer commodity prices.

As in many emerging markets, weak external demand and soft commodity prices contributed to South Africa’s economic downturn, but deep-seated structural factors also played an important role. An increase in workdays lost to strikes and increasingly binding supply bottlenecks, especially in electricity provision, were important factors behind South Africa’s growth underperformance, in addition to long-standing rigidities in product and labor markets, poor education outcomes, and apartheid legacies.

“We think that at the moment there are some structural impediments that are holding back growth and jobs. One key issue is increasing energy availability, also improving industrial relations, and accelerating implementation of some of the reforms in the National Development Plan,” Papi says.

Poor export performance and robust imports despite a large currency depreciation have kept the current account deficit above 5 percent of GDP. This, combined with low foreign direct investment, makes South Africa vulnerable to a pullback by foreign investors.

After years of accommodation, government debt has risen sharply. These vulnerabilities, however, are mitigated by the floating exchange rate, a favorable currency and maturity composition of debt, and the large domestic institutional investor base.

In an accompanying assessment of the South African financial sector, IMF staff found that risks are elevated given the challenging operating environment but are also manageable thanks to high capital adequacy buffers and strong supervision.

Nevertheless, downside risks dominate. More strikes and further delays in relieving electricity shortages are the key domestic risks. Also, South Africa, like other emerging markets reliant on external financing, remains vulnerable to tighter global financing conditions, lower world economic growth, and weaker commodity prices.

Notwithstanding the weak economy, the government’s 2014 Medium-Term Budget Policy Statement concluded that “fiscal consolidation can no longer be postponed.” The envisaged consolidation is significant, but additional measures may be needed to stabilize debt at the 50 percent of GDP level projected by the government.

Inflation remains close to the upper end of the South African Reserve Bank’s target range, but inflation’s momentum is slowing and the recent fall in oil prices may allow monetary policy to remain accommodative for longer. Nevertheless, over the medium term, real interest rates will have to rise to encourage domestic savings and address vulnerabilities.

Constrained policy space means structural reforms are the only way for South Africa to boost job-rich growth. Ongoing infrastructure projects are key, but should be complemented by increased private participation to ease pressure on public sector balance sheets.

Steps to normalize labor relations are vital and could be accomplished in a social bargain to raise product market competition and increase labor market inclusiveness. These reforms are not only critical to raise growth and job creation, but also to re-balance the economy toward exports and investment and to increase scope for countercyclical macro policies. As Finance Minister Nhlanhla Nene recently noted, “…the biggest constraints to a faster rate of growth are domestic factors, in other words things that are within our powers to fix.”

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IMF
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1263138