7 September 2006
The International Monetary Fund (IMF) has given the South African economy
the thumbs up in its 2006 article IV staff report, in-spite of global
volatility. The report, released today, is conducted annually for each of the
Fund�s member countries. South Africa was assessed on its macroeconomic
situation, including developments in the monetary, fiscal and financial sectors
of the economy. Article IV consultations are conducted annually for each of the
Fund�s member countries.
Growth is projected at 4,2 percent for 2006 and four percent for 2007. The
major risks to the forecast are external, a disorderly adjustment of global
imbalances, price of oil, falling commodity prices, and a continuation of a
slowdown in capital flows to emerging markets. On the domestic front, the
widening current account deficit is raised as a concern by the report. The
report does mention, however, that South Africa�s good fundamentals would
mitigate the impact of any adverse external shocks on the economy.
The report contains some analysis of the sharp depreciation of the rand
experienced in May/June this year. Four factors are mentioned as contributing
to the depreciation, namely, the current account deficit, the drop in price of
some of South Africa�s key export commodities, a slowing down of portfolio
flows to emerging markets, and the liquidity of the rand. With regard to this
last factor, it is mentioned that when there is capital flight away from
emerging markets, investors tend to sell the rand short to cover their exposure
to other less liquid, emerging market currencies.
The IMF is broadly supportive of the financial policies of the South African
Government. However, the report makes a number of suggestions for further
improving our policies, including:
Targeting the mid-point of the inflation band
The IMF praises South Africa�s inflation targeting framework, but suggests
that the mid-point of the band should be explicitly targeted, in order to
further anchor inflation expectations.
Relaxing labour market legislation
The IMF reiterates its long-held view that South Africa�s labour regulations
are too restrictive and discourage job creation. The Fund singles out
centralised collective bargaining and dismissal procedures for criticism, and
also notes that there should be more consideration for the impact of labour
regulations on small and medium enterprises (SMEs).
The IMF is supportive of Accelerated and Shared Growth Initiative of South
Africa (AsgiSA). However, the IMF staff report does not agree that the level
and volatility of the exchange rate is a constraint on South Africa�s growth,
stating that there is "no compelling evidence" to this effect.
The IMF regards South Africa�s financial sector as sound and
well-capitalised. The report does not view current levels of household
indebtedness as posing a threat to financial stability, but points out that
they could have wider macroeconomic implications, especially in the current
environment of rising interest rates.
The report contains some discussion of regional spillovers, areas where
South Africa�s policies might impact on our neighbours. Two areas in particular
were highlighted, the effect of further trade liberalisation (which the IMF
supports) on Southern African Customs Union (SACU) revenue and the stability
and regulatory implications of the presence of South Africa�s financial
conglomerates in the region.
The South African Government welcomes the report. We do not believe the
concerns would undermine the current strong economic growth trajectory, which
is underpinned by strong economic fundamentals and prudent macroeconomic
policies.
Issued by: National Treasury
7 September 2006
