Selected Issues


Selected Issues

Vulnerabilities and Buffers: How Resilient is the South African Economy?1

South Africa has weathered both external and domestic shocks. However, growth is weak, public sector debt has risen, and the large financial sector, though dominated by a well-capitalized banking sector, is exposed to weak state-owned enterprises. In addition, the current account deficit is financed by capital flows prone to volatility, and while a large share of external debt is denominated in rand, gross external financing needs are nonetheless sizable. In the event downside risks materialize, for example arising from tighter global financial conditions and potentially combined with a sovereign credit rating downgrade, abrupt capital outflows could ensue. This paper provides an overview of South Africa’s domestic and external vulnerabilities across all sectors of the economy and assesses the size of existing buffers to absorb the impact of potential adverse shocks.

A. Introduction

1. Accommodative global financial conditions have benefited South African financial markets. During several years, emerging markets have benefitted from portfolio inflows in search for yield. While some episodes of volatility have resulted in bouts of debt and equity outflows, emerging markets have received sizable net inflows. With its deep and liquid financial markets, inflows to South Africa have been similarly notable. Cumulative net non-resident portfolio investment flows (equity and debt) to South Africa during 2012–17 are estimated to have reached close to $90 billion (Figure 1). And despite some fluctuations, as of May 2018, South African 10-year yields (monthly average) have remained below the January 2016 high of 9.6 percent, which followed changes in ministerial appointments at the National Treasury in December 2015.

Figure 1.
Figure 1.

Quarterly Global Non-Resident Portfolio Flows

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

Sources: Institute of International Finance and IMF staf calculations.

2. However, South Africa is exposed to risks, and vulnerabilities are present in both domestic and external sectors. As discussed in the 2018 Article IV staff report for South Africa, risks originate from both external and domestic sources, including from tighter global financial conditions, weaker-than-expected growth in trading partners, and a materialization of contingent liabilities from state-owned enterprises (SOEs). Considering South Africa’s vulnerabilities, the impact of a materialization of such risks could propagate through the various sectors of the economy. Amid low growth, domestic vulnerabilities largely relate to unfavorable public-sector debt dynamics and weak SOEs. External vulnerabilities arise from significant gross external financing needs and a composition of current account deficit financing that is vulnerable to sudden reversals. The following sections discuss the main domestic and external vulnerabilities and assess existing mitigating factors and buffers to cushion the impact of potential adverse shocks. Possible adverse downside scenarios are discussed toward the end.

B. Domestic Vulnerabilities

Public Sector

3. Low growth and continued fiscal deficits have contributed to rising public sector debt. 2017 marked the fourth consecutive year with growth below two percent, and growth rates above 5 percent have not occurred since before the Global Financial Crisis (GFC). In addition, sustained fiscal deficits of around 4 percent of GDP or above during the past decade have led to an increase in debt. In turn, public-sector debt has doubled since 2007, reaching about 53 percent of GDP in 2017—largely on account of growing central government debt. Overall, South Africa’s public-sector debt is now larger as a share of GDP than in many other major emerging market economies.

4. In addition, fiscal risks have grown. Debt of SOEs has risen from 7 percent of GDP in FY2004 to around 14 percent of GDP in FY2016 (Figure 2). Amid weak balance sheets in some SOEs, contingent liabilities could materialize and further weaken public sector balance sheets. For example, as of March 2018, the state-owned electricity company Eskom and South African Airlines had combined outstanding government guarantees corresponding to 7.2 percent of GDP. Alongside, public sector debt ratios remain highly sensitive to continued weak growth. In the event that growth falls permanently 1 percentage point below the baseline over the projection horizon, public sector debt would continue to increase and likely surpass 70 percent of GDP by 2023.

Figure 2.
Figure 2.

Public Sector Vulnerabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

5. Combined with policy uncertainty, domestic vulnerabilities have led to sovereign credit rating downgrades. In April 2017, Fitch was the first credit rating agency to lower South Africa’s sovereign local currency rating to below investment grade, noting that the early 2017 cabinet reshuffle would likely result in a change in economic policy direction and that SOE debt could migrate onto the government balance sheet. In November 2017, after the release of the October 2017 Medium-Term Budget Policy Statement (MTBPS), which pointed to a worse-than-previously-projected public-sector debt trajectory, S&P followed suit and reduced the local currency sovereign credit rating to sub-investment grade. As a result, only Moody’s rated South Africa as investment grade.

6. The initial market reaction to domestic events highlighted the risks that fiscal vulnerabilities and policy uncertainty pose to the real economy. The release of the MTBPS led to sudden net portfolio outflows of about $1 billion during the eight business days following the release, prompting a 3½ percent exchange rate depreciation during that time, a sharp pickup in exchange rate volatility, and an increase in 10-year yields (Figure 3). The subsequent downgrade by S&P to sub-investment grade led to the exclusion from Barclays Global Aggregate index and was followed by a close to $1 billion in portfolio outflows during the subsequent three weeks—a period which was also impacted by uncertainty leading up to the election of the ANC president in December. Overall, with more than 40 percent of local currency government bonds held by nonresidents as of end-2017, this situation highlighted South Africa’s exposure to sudden financial market reactions.

Figure 3.
Figure 3.

Financial Market Exposure and Developments

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

7. The resilience of the South African economy helped reduce the impact on economic stability. The initial market impact of domestic events was relatively short-lived, and 10-year yields remained below 10 percent. In addition, as international companies listed on the Johannesburg Stock Exchange (JSE) have offshore earnings that are unrelated to South Africa-specific factors, they may have benefited from exchange rate depreciation, thereby providing a stabilizing role for equities. In fact, portfolio equity flows recorded a net inflow of $¼ billion during the three weeks following the S&P downgrade—though this followed equity outflows during several months of 2017 until early October and coincided with global net non-resident equity flows also to other emerging markets (Figure 4). But investment in bonds also strengthened. Following the positive market sentiment after the leadership change in the ruling party, South Africa recorded net non-resident portfolio bond inflows of about $½ billion in the week following the change—though it was not until early March this year after significant inflows in late February that bond inflows had made up for the outflows that started in October 2017.

Figure 4.
Figure 4.

Monthly Net Non-Resident Portfolio Flows to Emerging Markets

(USD billion)

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

Sources: Institute of International Finance and IMF staff calculations.

Non-financial Private Sector

8. Corporate private sector vulnerabilities are generally manageable but with pockets of vulnerabilities. While non-financial corporate debt has risen, it compares favorably to other major emerging markets (Figure 5). More than half of corporate debt is denominated in local currency, and about three quarters of debt has maturity longer than one year. In addition, profitability appears generally sound in a cross-country perspective. That said, profitability in some sectors (e.g. mining and manufacturing) has weakened during the past several years, and debt at risk among non-financial SOEs has worsened as measured by the interest coverage ratio.2 Eskom, as of May 21, 2018, had an outstanding stock of bonds and loans of about R400 billion (8V2 percent of 2017 GDP), with about R190 billion issued in foreign currency. Hence, with significant government guarantees among some SOEs, vulnerabilities in this sector are closely linked to those that can impact the public sector.

Figure 5.
Figure 5.

Nonfinancial Corporate Vulnerabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

Sources: IMF Corporate Vulnerability Utility, Institute of International Finance, and SARB Financial Stability Review, October 2017.

9. Aggregate household debt is moderately high in a cross-country perspective, and it should be considered in the context of high poverty and unemployment rates. Household debt has steadily declined since the GFC and virtually all household debt is denominated in rand. However, the level of household debt at 34 percent of GDP at end-2017 is moderately above that in some other major emerging markets (Figure 6). Further, more than half the population lives in poverty and high unemployment continues to constrain household financial positions, posing a risk to debt servicing and limiting access to credit. As of 2017, household debt amounted to 72 percent of disposable income. Furthermore, households face an interest rate spread of around 250 basis points relative to the prime rate, and loans and advances to households remain subdued at around 4 percent year-on-year in April 2018. A further increase in interest rates could therefore put pressure on household debt servicing, and impact bank balance sheets.

Figure 6.
Figure 6.

Household Vulnerabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

Sources: Institute of International Finance and SARB Financial Stability Review, October 2017.

Financial sector

10. The financial sector is large and highly integrated with other sectors of the economy. The size of the financial sector is significant. It is dominated by the highly concentrated banking sector, and financial sector profitability is healthy in a cross-country perspective (Figure 7). Moreover, pension funds also play a significant role, with the Public Investment Corporation (PIC) managing government employees’ pension assets. Assets of pension and provident funds (including both official and private self-administered funds) amounted to R 3.5 trillion (76 percent of GDP) as of the third quarter of 2017, with more than half accounted for by official pension funds. In turn, linkages between the financial and other sectors of the economy could potentially propagate adverse shocks to the real economy.

Figure 7.
Figure 7.

Financial Sector Vulnerabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

11. Overall, the large and highly concentrated banking sector is well-capitalized and profitable. As of November 2017, banking sector assets corresponded to around 110 percent of GDP, with more than 90 percent of assets accounted for by the five largest banks (Table 1). Capital adequacy is above regulatory requirements, and profitability—while having declined moderately amid weak economic growth—remains strong. However, a further slowdown in growth could result in an increase in the share of non-performing loans, thereby feeding into bank balance sheets. In addition, the banking sector is exposed to sizable contingent liabilities, though these largely relate to credit lines with international companies located in South Africa.

Table 1.

South Africa: Selected Bank Balance Sheet Items

article image
Sources: SARB BA900 November 2017 and IMF staff calculations.

12. However, there are pockets of vulnerabilities within the sector. On average, banks outside the Top 5 hold equity capital of around 15 percent of unweighted assets—nearly twice the level observed among Top 5 banks.3 However, NPLs among the smaller banks are also significantly higher than among the Top 5, with some smaller banks reporting NPLs of above 20 percent of loans (Tables 1 and 2). Notably, the balance of capital ratios and NPLs for a couple of medium-sized and small banks is near that observed for African Bank when it was moving toward curatorship in 2014 (Figure 7). In addition, non-resident foreign-currency and derivatives funding is relatively large outside the Top 5—at 13 percent of total assets on average, and up to 30–50 percent of assets in some cases. On the funding side, while medium-sized and small banks on average tend to rely more on retail deposits than the Top 5, some individual banks rely heavily on wholesale deposits (Table 3). As such, while the banking system as a whole is well-capitalized and profitable, some smaller, individual banks create vulnerabilities—though in isolation they would likely not be of systemic importance.

Table 2.

South Africa: Bank-Level Indicators

(As of November 2017)

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Sources: SARB and IMF staff calculations.
Table 3.

South Africa: Banking Sector Reliance on Wholesale Deposits

(Wholesale deposits in percent of total deposits)

article image
Sources: SARB and IMF staff calculations.

13. The PIC constitutes a major part of the South African financial sector. Managing a significant share of pension fund assets in South Africa, the government-owned PIC is also the largest asset manager on the African continent, with more than R2.1 trillion (about 46 percent of GDP) of assets under management as of end-2017. Of these, close to 90 percent are those of the Government Employees Pension Fund (GEPF) (Figure 8). PIC assets under management are invested in a variety of asset classes, in particular fixed income and equity. While PIC holds non-negligible stakes in the banking sector, deposits with banks account for less than 2½ percent of total banking sector deposits.

  • Fixed income. PIC fixed income investments are exclusively in instruments listed on the Bond Exchange of South Africa. As of end-2017, PIC held about 20 percent of government domestic marketable bonds (R452 billion or close to 10 percent of GDP) and more than 50 percent of SOE debt securities.

  • Equity. PIC is the largest single institutional investor on the JSE (PIC, 2017). Notably, PIC is a large shareholder in South Africa’s major banks, owning in 2017 (as an example) about 12 percent of Standard Bank shares.

Figure 8.
Figure 8.

Public Investment Corporation Assets and Liabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

14. Overall, with a generally strong banking sector, domestic financial sector vulnerabilities are largely related to its exposure to SOEs. While only about 2½ percent of banking sector bonds and loans are to SOEs, PIC is heavily exposed to large SOEs, including Eskom and Transnet. Hence, in a tail event, a large SOE failure could spill over to the financial sector through the PIC. Furthermore, while PIC deposits account for only a small share of deposits in the banking sector, these are concentrated in few banks. Hence, to the extent an adverse shock prompts a sudden withdrawal of PIC deposits (which amount to about 2 percent of GDP), this could potentially put strains on funding in some banks with potentially systemic impact.

C. External Vulnerabilities

15. Gross external financing requirements are large. While the current account deficit has narrowed to 2.5 percent of GDP in 2017, it remains high relative to that in peer economies (Figure 9) and relative to the estimated norm (see the 2018 Article IV staff report for South Africa). In addition, total external debt has steadily increased, reaching nearly 50 percent of GDP as of end-2017—almost a doubling since end-2007. As a result, external debt service needs are significant. As of end-2017, short-term debt at remaining maturity amounted to more than 14 percent of GDP, of which more than 50 percent is foreign-currency external debt of the monetary and non-financial private sectors. Public sector and SOE external debt is largely of maturity longer than one year.

Figure 9.
Figure 9.

External Sector Vulnerabilities

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

16. In addition, the current account deficit is financed primarily by flows prone to reversals. In 2017, the current account deficit was financed entirely by net portfolio flows (equity and debt). In contrast, the more stable foreign direct investment flows continued to record a net outflow, reaching -1.7 percent of GDP last year. Hence, the composition of the current account financing is a source of vulnerability, as abrupt changes in global demand for emerging market assets can result in sudden capital outflows.

17. While IIP assets are large, they are exposed to significant valuation risk. The net international investment position (net IIP) was positive at 12 percent of GDP at end-2017 (when valued in rand-terms), amid large external assets (149 percent of GDP) and liabilities (137 percent of GDP). However, excluding the generally less liquid net FDI position, the net IIP position would have been markedly lower at -20 percent of GDP. Furthermore, FDI assets are vulnerable to sudden valuation changes. For example, the 30 percentage point of GDP increase in the net IIP between 2010 and 2016 is highly related to a rise in the valuation of FDI assets in China—owing in particular to a significant increase in the valuation of an investment in the Chinese technology company, Tencent.4 The end-2016 net IIP position of 7 percent of GDP would have been about 20 percent of GDP lower if the increase in FDI assets in China were to be excluded. As such, the positive net IIP position should be interpreted with caution.

D. Mitigating Factors and Existing Buffers

18. While vulnerabilities expose the South African economy to risks, mitigating factors and existing buffers can help cushion the impact of adverse shocks, should they materialize. This section provides an overview of mitigating factors and takes stock of existing buffers, in particular those related to international reserves.

Mitigating Factors

19. South Africa benefits from several mitigating factors. As noted above, together with other major emerging markets, South Africa has benefitted from favorable global market conditions during the past few years, with capital flows highly correlated with global flows. However, the economy’s resilience has been reflected in the largely temporary financial market reactions during periods of stress. In addition, the flexible exchange rate provides an automatic cushion in response to shocks. Further, the large financial sector, including with assets corresponding to more than 40 percent of GDP managed by the PIC, can provide a buffer in the event of sudden nonresident capital outflows. The low share of foreign currency-denominated government debt (about 10 percent) and long average term to maturity of debt (about 15 years) limit the public sector’s exposure to exchange rate risk. The share of overall external debt denominated in foreign currency has also moderated since the GFC and is now below 50 percent of total external debt. Furthermore, while short-term external debt at remaining maturity is non-negligible, more than 40 percent is denominated in rand. About 20 percent of short-term debt (original maturity) is related to FDI debt.

Existing Buffers

20. Reserve adequacy can be assessed against several different metrics. For emerging markets, the Fund considers in particular the Assessing Reserve Adequacy (ARA) metric, which is a weighted sum of four underlying sources for capital flight. Reserves are considered adequate when they are between 100 and 150 percent of the ARA metric. Other indicators include reserves relative to short-term debt at remaining maturity (with an adequacy threshold of 100 percent) and reserves relative to broad money (with an adequacy range of 5–20 percent). For countries with floating exchange rates, the ARA metric is computed with the following variables and weights (IMF, 2016a):5

  • Short-term external debt at remaining maturity. Captures rollover risk. The weight in the ARA metric is 0.3.

  • Other external liabilities. Captures the risk of nonresident equity and medium- and long-term debt outflows and is computed as the sum of portfolio and other investment liabilities, less short-term external debt at remaining maturity. The weight in the ARA metric is 0.15.

  • Broad money. Captures the risk of resident outflows. The weight in the ARA metric is 0.05 for countries without capital flows measures and 0.025 for countries with capital flow measures.

  • Exports. Captures the potential loss of export income. The weight in the ARA metric is 0.05.

21. Reserve adequacy has recently declined, and is low relative to other emerging market economies. While reserve adequacy strengthened in the early 2000s, an increase in other external liabilities during the past decade has heightened the need for additional reserves as reflected in an increase in the ARA metric (Figure 10). In turn, the South African Reserve Bank’s (SARB’s) efforts to build reserves through 2012 (without targeting a level of the exchange rate) did not continue to strengthen reserve adequacy relative to the metric. As a result, end-2017 reserve adequacy (as measured by the ARA) declined to 64 percent of the unadjusted ARA metric (70 percent of the ARA after accounting for existing capital-flow measures (CFMs))—close to $30 billion short of reaching the lower bound of the ARA adequacy range at 100 percent of the ARA metric. In addition, South Africa’s level of reserves does not compare favorably relative to many other emerging markets. However, reserves at end-2017 were above the adequacy thresholds for short-term debt at remaining maturity (reserves were at 102 percent of short-term debt at remaining maturity) and broad money (reserves were at close to 20 percent of broad money).

Figure 10.
Figure 10.

Reserve Adequacy

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

22. Beside international reserves, South Africa has access to other parts of the global financial safety net.

  • BRICS Contingent Reserve Arrangement (CRA). The BRICS CRA was established in 2015 by Brazil, Russia, India, China, and South Africa with the objective of providing protection against global liquidity pressures. CRA resources amount to $100 billion of which South Africa contributes $5 billion. Total access to the CRA for South Africa amounts to $10 billion, of which 30 percent can be accessed without an IMF arrangement.

  • Bilateral swap line with China. In April 2015, SARB entered into a bilateral currency swap agreement with the People’s Bank of China, amounting to CNY30 billion (about $4.7 billion). The “purpose of the swap line is to support trade and investment between South Africa and China, and to act as a mitigating resource for short term balance of payment pressures” (SARB, 2015). While the initial agreement was for three years, the agreement was extended in 2018 for a further three-year period.

E. Downside Scenarios

23. A tail-risk scenario could have a material impact on the economy. A materialization of downside risks—for example prompted by tighter global financial conditions—potentially combined with a sovereign credit rating downgrade, could prompt sudden and significant non-resident capital outflows. In turn, this could substantially impact the South African economy. For example, the materialization of a large contingent liability could prompt an increase in borrowing costs and a higher deficit and debt ratio, in turn weighing on growth. In a severe downside scenario with significant capital outflows and exchange rate depreciation, this would increase borrowing costs also for SOEs and banks. To the extent that non-resident demand for government bonds dry up, the PIC could potentially step in to help support demand, though this could occur at the expense of funding to banks. In turn, banking sector credit extension would be curtailed, with resulting negative feedback effects to investment and growth. Furthermore, GEPF members’ benefits are guaranteed by the state. Hence, if for any reason pensioners are not paid their pension benefits—which should be payable from PIC’s investments—the government would have an obligation to fill any remaining gap. Thus, significant macro-financial linkages can result in an adverse economic impact.

24. A sub-investment grade rating of South Africa’s sovereign local-currency credit rating by all three credit rating agencies could prompt capital outflows and increased funding costs. In March 2018, Moody’s maintained South Arica’s sovereign rating at Baa3 (the lowest investment grade) and changed the outlook to stable, reducing the probability of a near-term downgrade to below investment grade. However, in the event a downgrade should occur, a sub-investment grade rating by both S&P and Moody’s would prompt exclusion from Citigroup’s World Government Bond Index (WGBI), resulting in forced sales of domestic government bonds. In fact, some sales by bench-markers and index trackers occurred after downgrades of South Africa’s local currency rating to below investment grade by Fitch and S&P. As of March 2018, remaining investment grade (IG) sensitive investors appeared to be only those tracking the WGBI. Overall, staff estimates that while in 2016 about 20 percent of local currency government debt was held by IG-sensitive investors (IMF, 2016b), this share has now fallen to around 2 percent (Table 4). Therefore, a sovereign downgrade by Moody’s, should it occur, could prompt forced outflows of about $1½ billion or ½ percent of GDP.6 As some outflows have already occurred, this estimate is below staff’s 2016 estimate of about 2½ percent of GDP (IMF, 2016b). However, actual outflows could well exceed those arising from forced sales to the extent that negative market sentiment results in additional outflows, not least considering the hedge fund participation in the South African bond market. Furthermore, funding costs for the sovereign as well as SOEs and banks could rise after a potential loss by the sovereign of investment-grade status, with resulting impact on spending and growth.

Table 4.

South Africa: Potential Forced Nonresident Outflows from Sovereign Downgrade

(Estimated share of benchmarking by nonresident investors as of March 2018)

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Sources: Bloomberg and IMF staff calculations.

25. Cross-country experiences suggest that outflows could be significant. A number of countries, including South Africa, have faced temporary periods of stress. As the GFC hit the global economy in 2008, nonresident capital abruptly fled several major emerging markets. In the fourth quarter of 2008, Brazil faced net capital outflows of $15½ billion (about 0.9 percent of 2008 GDP) amid both non-resident and resident outflows (Figure 11). In contrast for South Africa, while portfolio outflows contributed to $7½ billion in nonresident capital outflows in the fourth quarter of 2008, resident inflows and errors and omissions were more than offsetting. Overall, South Africa did therefore not experience net outflows in any quarter during 2008–09.

Figure 11.
Figure 11.

Capital Flow Developments 1/

Citation: IMF Staff Country Reports 2018, 247; 10.5089/9781484371473.002.A003

1/ Downgrades may have differential impact on local- and foreign-currency denominated debt outflows depending on whether the local- or foreign-currency rating is downgraded. The charts here do not capture this point.

26. An adverse scenario in South Africa would likely differ from a typical boom-bust scenario. Amid already weak growth and compressed imports, the current account deficit has narrowed. In 2017, the trade and services balance was positive at 1.4 percent of GDP. Instead, the current account deficit resulted from deficits on the income and transfer accounts amounting to 3 and 0.8 percent of GDP, respectively. Therefore, while significant capital outflows could prompt a decline in imports, they would likely also lead to a short-term improvement in the income account on the back of reduced nonresident holdings of assets (albeit in the context of large IIP stocks). However, external debt servicing costs could rise markedly, not least considering significant gross external financing needs.

28. In addition, capital flow responses to sovereign credit rating downgrades have varied. For Brazil, net nonresident portfolio outflows started a few months before S&P downgraded the local currency sovereign rating to below investment grade in September 2015, and outflows continued through downgrades by Fitch and Moody’s and for several months thereafter. Overall, net nonresident portfolio outflows amounted to about 1.1 percent of 2015 GDP during the one year following June 2015. In contrast, for Turkey, downgrades prompted a pause in net nonresident portfolio inflows, which picked up again after the third downgrade below investment grade. For South Africa, after sustained nonresident portfolio outflows during the second half of 2016, monthly net nonresident flows remained broadly constant through 2017.

F. Concluding Remarks

29. The South African economy is resilient, but is exposed to shocks through domestic and external vulnerabilities. South Africa has weathered well bouts of volatility in 2017 as the flexible exchange rate has helped cushion the impact of shocks. The large financial sector has also provided a domestic investor base for government bonds. But vulnerabilities exist in both domestic and external sectors of the economy. Domestic public-sector finances have worsened during the past decade and fiscal risks from SOEs have risen. Significant sovereign-financial linkages can propagate shocks, should downside risks materialize. In addition, external financing needs are large and the current account deficit is financed by flows subject to sudden reversals. In turn, potential capital outflows could be significant, should nonresident investors leave South Africa, whether on the back of the materialization of domestic or external shocks.

30. Policies focused on supporting strong and inclusive growth would strengthen resilience. To further build resilience, policies should be aimed at reducing vulnerabilities through structural reforms to lift growth and fiscal consolidation to rebuild policy buffers. An improved business environment would encourage private investment and support job creation. Alongside a strengthening of public-sector balance sheets, strong and inclusive growth will require maintaining an effective social safety net and modernizing infrastructure to support investment. As opportunities arise and subject to meeting the inflation mandate, accumulation of international reserves toward adequate levels would strengthen buffers.



Prepared by Lone Christiansen and Ken Miyajima; reviewed by Ana Lucía Coronel.


The interest coverage ratio expresses the extent to which cash flow is sufficient to cover interest payments on debt. A declining ratio suggests an increasing share of debt at risk.


As determined by the size of assets.


Reportedly, South Africa’s Naspers paid $32 million for a stake in Tencent in 2001, which in March 2018 was worth $175 billion. In March 2018, it was announced that Naspers planned to sell about $11 billion (2 percent) of Tencent shares, reducing its holding to about 31 percent of shares (see Reuters, 2018, and Financial Times, 2018).


Weights for fixed exchange rate regimes are larger for other external liabilities, broad money, and exports than for flexible exchange rate regimes, reflecting the additional need for reserves to defend the level of the exchange rate. The ARA metric can also be adjusted for commodity exports, considering that additional reserve accumulation for commodity exporters may be warranted to safeguard against commodity price shocks.


Assuming the new baseline and based on two benchmark bonds (R186 and 2023).

South Africa: Selected Issues
Author: International Monetary Fund. African Dept.