South Africa Should Set Government Debt Target, IMF Says

South Africa should set a debt target to improve the credibility of its fiscal policy as slower economic growth makes it difficult to keep the budget deficit under control, the International Monetary Fund said.

Government debt may stabilize at about 47 percent of gross domestic product in five years, with a 10 percent chance that the ratio can reach 63 percent by 2020, the Washington-based lender said in its annual Article IV country report, published on its website today.

“Determining an appropriate debt benchmark remains highly controversial,” the IMF said. “Given South Africa’s outlook, the magnitude of macroeconomic and fiscal shocks, and cross-country comparisons, reducing the debt-to-GDP ratio to around 40 percent by 2020 would allow the country to rebuild adequate fiscal space.”

Falling tax revenues and spending pressures contributed to a widening in the budget deficit to 5.1 percent of GDP in the year through March, prompting the government to increase borrowing. Finance Minister Pravin Gordhan forecast gross debt will reach 45 percent of GDP in the year through March 2016 from an estimated 42 percent last year.

While the state’s agreement to limit wage increases for the next three years to 1 percent and to set explicit expenditure ceilings was positive, “the government’s poor record in controlling the wage bill and potential spillovers from high wage demands in other sectors represent downside risks,” according to the report.

Currency Policy

The IMF said one of the main risks to the South African economy is a prolonged halt to capital inflows, used to finance the current-account shortfall and support the rand. The currency has slumped 16 percent against the dollar this year, the worst performer of 16 major ones monitored by Bloomberg. The rand fell 0.3 percent to 10.0584 per dollar as of 2:10 p.m. in Johannesburg.

South Africa’s economy will probably expand 2 percent this year, according to the IMF, falling short of the National Treasury’s estimate of 2.7 percent and in line with the Reserve Bank’s latest forecast. The IMF forecast 2.9 percent growth for 2014. The government has said it needs 7 percent annual growth to reduce a 25.6 percent jobless rate.

“Quicker implementation of much-needed structural reforms could result in higher growth and job creation,” the IMF said.

The flexible exchange rate should be maintained as its a strength to the economy, the IMF said, while recommending authorities consider regular and pre-announced auctions to buy foreign exchange.

The central bank’s policy is not to intervene in the currency market to influence the level of the rand, though it buys foreign exchange to boost reserves when conditions are favorable. Reserves rose 1.3 percent to $47.95 billion in August, according to data from the bank.

To contact the reporter on this story: Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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