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 were 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.

Credit Ratings

The widening budget deficit contributed to Moody’s Investors Service, Standard & Poor’s and Fitch Ratings downgrading the nation’s debt in the past year, the first reduction in the credit ratings since the ruling African National Congress took power in 1994. Moody’s rates South Africa at Baa1, the third-lowest investment grade level.

South Africa “remains committed to fiscal consolidation and the need to rebuild fiscal space,” the National Treasury said today in an e-mailed statement in response to the IMF report.

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 0.5 percent to 10.0765 per dollar as of 5:19 p.m. in Johannesburg.

Growth Forecasts

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 estimated 2.9 percent growth for 2014. The government has said it needs 7 percent annual expansion to reduce a 25.6 percent jobless rate.

Gordhan is due to give updated GDP growth and budget projections in a mid-term budget on Oct. 23.

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

The cabinet in August “agreed on a number of measures aimed at reigniting economic growth,” according to the Treasury. “The South African economy can no longer rely heavily on the global economy to reignite growth and create job opportunities,” it said.

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

While the central bank’s policy is not to intervene in the currency market to influence the level of the rand, 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.

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