Does SA really need, or qualify for, an IMF bailout? Thankfully, no.
Not only is SA not experiencing the crises the IMF feels warrants crisis lending, it’s not in the throes of domestic factors that could lead to a crisis
At the ANC’s recent national policy conference, Finance Minister Malusi Gigaba stated that the struggling South African economy could, in the future, require financial assistance from abroad if economic growth is not re-ignited. Many have interpreted this as suggesting a "bailout" from the International Monetary Fund (IMF).
Sovereign states are able to approach the IMF for financial and technical (non-financial) support during both calm and stormy conditions. The latter is certainly better known, with Greece a prime example in recent times. Good-weather assistance varies in magnitude and nature.
In troubled times, the IMF can consider what it calls "crisis lending" — bailout is a term popularised by the media in a similar manner to "junk status". This includes stand-by arrangements that address short-term or potential balance of payments problems.
For countries with sound policies, the IMF offers flexible credit line, and precautionary and liquidity line programmes. These help prevent or mitigate crises and boost market confidence during periods of heightened risks.
The IMF provides support only on request by a member country. So, is SA currently in a crisis that qualifies for any of these programmes? Or are we experiencing shocks that can lead to such crises, thus allowing the government to request support from the IMF?
Crises can take many different forms, and the IMF notes three in its documentation related to crisis lending.
First, balance of payment crises can arise when a country is unable to import essential goods (such as maize) or service its external debt repayments. Secondly, financial crises originate from insolvent or illiquid financial institutions. Thirdly, fiscal crises are caused by excessive fiscal deficits and government debt.
Countries that approach the IMF for support often struggle with more than one of these. According to the IMF, these crises generally result in slower economic growth, higher rates of unemployment, lower incomes, and greater uncertainty over a country’s future. This can translate into a deep recession and, in acute cases, defaults or restructuring of sovereign debt.
Is SA experiencing one or more of these crisis at present? Not really.
First, cross-border payments have not been disrupted, and the country’s current-account deficit narrowed to an equivalent of 1.7% of GDP during the fourth quarter of 2016. This was the best level in nearly six years.
Secondly, the Reserve Bank reported in April that the banking system "remained sound and well capitalised". And thirdly, SA’s projected fiscal deficit and government debt in 2017 will be roughly on par with a group of nine other countries with BB+ ratings — these include Russia, Portugal and Turkey.
If, based on the above, we take the view that the South African economy is not yet in crisis mode, it is also necessary to consider the domestic and external factors that could result in a crisis in the near future if left unchecked.
The IMF lists external factors as including shocks ranging from natural disasters to large swings in commodity prices — these are common causes of crises in low-income countries — as well as capital-flow volatility due to sudden changes in market sentiment.
From a natural disaster perspective, SA experienced its worst drought in 30 years during 2015-16, though agriculture in summer rainfall areas has recovered following good precipitation. Farming also accounts for just a small proportion of GDP (2.5%) and employment (5.5%).
International commodity prices have recovered since 2016. South African mining sales increased in value by almost 15% during the first four months of 2017. The industry has also seen a marked decline in labour action over the past year.
Sovereign downgrades are usually a signal that capital outflows are imminent. However, Reserve Bank governor Lesetja Kganyago commented late in April that SA had managed to continue attracting capital inflows on the back of increased appetite for emerging-markets assets. As a result, while the global economic and geopolitical environment is strained — think Trump, Brexit and Islamic State — it does not appear that SA is presently experiencing the kind of external shocks listed by the IMF as external causes of a crisis.
Alternatively, the IMF lists domestic shock factors, including an exchange rate fixed at an inappropriate level, a weak financial system, inappropriate monetary and fiscal policies, and weak institutions and/or political instability.
SA has a free-floating exchange rate, a sound financial system and prudent monetary policy. Regarding fiscal matters, the IMF commented in May that given rising public-debt ratios, the country’s fiscal policy "is appropriately focused on maintaining medium-term debt sustainability".
The quality of SA’s institutions has come into question of late, given recent legal and political developments: Moody’s Investors Service said in early June that evidence of systemic weakening of the institutional framework is among the reasons for its downgrade. However, despite some recent deterioration, institutional quality has certainly not evaporated. The Fragile States Index 2017, published in May, ranked the population’s level of confidence in SA’s state institutions and processes 91st worldwide.
This leaves only political instability as a shock-into-crisis factor. But how would the IMF define this?
In light of all the other factors above being quantifiable, one issue would be to find a measurement for political instability. In a 2013 working paper investigating the effect of social and political instability on an economy’s output, IMF researchers considered quantitative proxies for political instability.
One option is to count the number of times that 50% of cabinet posts are transferred to new ministers. President Jacob Zuma has, in essence, had 11 Cabinets since being elected in May 2009. His biggest overhaul of appointees was three years ago after being re-elected in the 2014 national elections, when 47 changes were made to the Cabinet — including the introduction of new ministries.
The 20 changes made to the Cabinet in March 2017 was also substantial, and similar in size to the 26 changes made in October 2010. However, the most recent change was far from the IMF’s 50% threshold — there are currently 74 seats in the Cabinet, equalling a change of 27%.
More complex metrics can also be used to calculate indicators for political stability. These estimates take into account, for example, the system of government, the rule of law, income inequality, threats to government sovereignty, continuity of policy, and social and economic stability.
A political stability index calculated by risk consultancy Eurasia Group reflects a decline in the strength and cohesion of the government since mid-2016 as factionalism in the ANC increased policy uncertainty. Stability of the security environment was also weaker over the past six months.
However, Eurasia Group has also seen an improvement in political mobilisation, a decline in labour unrest and some support for the economy from higher commodity prices. As a result, their overall scoring of the "moderate risk" political situation has been unchanged over the past 10 months.
So, does SA qualify for an IMF bailout? Probably not.
The country is not currently experiencing a scenario warranting crisis lending from the IMF and has, over the past 12 months, not really experienced any of the shock factors associated with causing such a crisis.
This is actually good news. Absent such a crisis or crisis-causing factors, SA is in a better position compared to other countries — Hungary, Iceland and Kenya, for example, which have, in recent history, required crisis lending facilities from the IMF.
SA is certainly facing one of its most challenging periods since 1994, from both a political and an economic perspective. However, its numerous fundamental strengths has enabled the country, up until now, to avoid a decline into full-blown crisis. These strengths include good observance of contracts and intellectual property rights, a growing middle-class with rising incomes, first-world standards in manufacturing, and a clearly defined taxation system, among others.
Of course, the lack of a full-blown crisis also does not preclude non-crisis support from the IMF, which regularly provides financial and technical support to many countries, and a representative team visited SA in June as part of its annual consultations.
However, IMF programmes and associated financial assistance come with reform requirements, and link financing with policy changes. In the case of SA, the organisation would like to see reforms to the energy, transport and telecommunications industries.
Cross-country research by its analysts showed that reforms of these markets are usually followed by significant increases in output and employment.
The message here is that support from the IMF does not come without conditions, and the organisation is ready with a checklist of desired reforms.
• Viljoen is an economist with KPMG SA.