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IMF rumours may be the scare South Africa needs

Threat of a bailout could prompt government to push through much-needed economic reforms.

The threat of an International Monetary Fund bailout, unthinkable a few years ago, may force government to push through the reforms it needs to rescue the economy.

An expanded bailout for struggling power utility Eskom and calls from other state companies for support have strained the nation’s budget, prompting business groups and analysts to warn the country could be pressed to ask the IMF to help keep a lid on ballooning debt.

“The IMF is used as a scare tactic to make the government aware that if we don’t implement the necessary policies, we may be forced to turn” to them, Thabi Leoka, an independent economist, said in an emailed response to questions. “South Africa’s problems are not insurmountable. We know what we need to do. Our problem is the lack of implementation and political will.”

Read: What an IMF bail-out will look like…

The Washington-based lender, central bank and the government have said South Africa doesn’t need IMF help and that authorities can still do what’s needed. While President Cyril Ramaphosa and the ruling African National Congress will be unlikely to request support, the nation’s biggest business lobby said they may have to unless they act soon to fix the problems at the cash-strapped state-owned electricity company and to remove obstacles to economic growth.

Seeking help from the IMF would be politically dangerous for the ANC as it could be seen as a failure to manage the economy, and being answerable to a foreign institution would give ammunition to opposition parties such as the Economic Freedom Fighters that advocate wholesale nationalisation.

Waning confidence

The possibility of IMF assistance “is in the headlines because people doubt the ability of the state to effect any economic reforms that are urgent and so required for us to deal with the structural problems,” said Lumkile Mondi, an economics lecturer at the University of the Witwatersrand in Johannesburg. “People have got no confidence, so they’re looking for a third party to help us implement a form of a structural-adjustment program.”

Business confidence has cooled from the two-year high it reached after Ramaphosa won the leadership of the ruling party and took over as president of the country in February 2018. He has pledged to create jobs and make it easier to do business as he seeks to lure $100 billion in new investment.

The government will announce a plan to improve the economy within weeks, Minister in the Presidency Jackson Mthembu told reporters on August 8. “There is no need or appetite from the South African government to approach any financial institution for help.”

Budget constraints amid weak economic growth have prompted calls for urgent action.

Eskom has R440 billion of debt  and is battling to meet demand for electricity from ageing plants. The government’s plan to give it R128 billion in assistance over three years will add to state liabilities and widen the fiscal shortfall. Fitch Ratings estimates the budget gap may climb to 6.3% of gross domestic product this year, and government debt to 68% of GDP in two years.

Read: Eskom’s R20.7bn blowout strains SA’s finances

That’s at a time when the economy contracted the most in a decade in the first quarter and unemployment climbed to 29%.

Floating currency

Allocating new broadband spectrum and simplifying visa rules to boost tourism and bring in necessary skills are “readily achievable policies” that can boost confidence, the IMF’s resident representative in South Africa, Montfort Mlachila, said last week. Other measures that could help are more labor-market flexibility and leaner state-owned companies.

South Africa’s floating exchange rate acts as a buffer to external shocks and gives it the resilience to avoid running into balance-of-payments trouble, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank. International reserves of $49.8 billion and the fact that external debt is mostly rand-denominated provide additional support, she said.

While Ramaphosa has held investment and jobs summits, at which companies such as Daimler AG’s Mercedes Benz pledged to invest and others promised to create 275 000 jobs a year, local businesses have been hesitant to commit, and forecasts for economic growth have declined.

Ramaphosa is contending with “denial politics regarding the seriousness of the financial fundamentals” among some members of his party and must instil a sense of urgency in delivering reforms, said Ralph Mathekga, an analyst and author of books on South African politics.

If reforms fail, South Africa will be left with no choice but to seek a bailout, according to Gary van Staden, a senior political analyst at NKC African Economics. However, the government will prefer going to the Brics New Development Bank or other institutions before going to the IMF, he said.

© 2019 Bloomberg L.P.

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The biggest problem in SA is not even the looting and state capture. It is the unions, who have the country over a barrel. The moment any politician tries to do what is necessary, i.e. firing 60% of all SOE and public-alleged-service wêkkas, is the minute anarchy will reign and Marikana will happen 50 times over.

Because of this, the ANC will first plunder your pensions and then try to print money, rather than going to the IMF. By the time it is forced to go to the IMF, we will be in an Argentina-like situation, with 50% or 100% inflation and a rand worth R500 to a dollar.

Each politician and union boss, as part of their mandatory training, should be forced to live in Zimbabwe for 3 months and be paid in Zim dollars.

It depends. If the voting public is cared of the IMF then that might cause the ANC to change… Are they? I suspect they might not know who they are. And if we do as Zim does, and simply say go away to the IMF, we could still have ANC/ZanuPF in power despite the collapse. IMF wont help politically.

A rating downgrade is a speeding ticket on the road to hyperinflation. The prerequisites for the IMF loan is the cost of the speeding fine. Countries can choose to ignore the fine and to keep on speeding towards hyperinflation.

What is most disturbing is the apathy of the SA voter. How did we get here? Mismanagement, corruption and theft brought by the majority party for 25 years. SOEs were not always broken -the ANC leadership had this happen on their watch and 57% of SA voters voted for more of the same. Sorry-you have to live with your decisions-its called life.

SA is at a tipping point now-unions are killing the economy and the ANC leadership -particularly the hopelessly incapable Patel-are unable to stop the decline . Crime,unemployment and SOE failure is soaring-growth is non existent and the population keeps on growing compounding the problem

All the elements of a failed state.

An IMF Bailout with IMF laying down the Rules is probably the best thing that could happen : However its unlikely as our “leaders” are incapable of keeping to any form of “rules” , so even the IMF might consider RSA too risky !!

SA is under assessment this year with the IMF so it depends on the balance of accounts within 2 years our GDP debt to ration will hit 68%. That means 68% of annual GDP goes towards servicing debt and the balance of 32% that goes towards services grants pensions etc, no freaking ways man. We are borrowing more than what we actually produce. The IMF has to step in I am not letting my taxes go down the drain like it has for the past 25 years no freaking ways. In fact we can let the Chinese run SA cut all expenditure fire all the bloated unions that cripple SA labour market and reduce the socialist policies of freedom to actually solid reform with heavy conditions. I guarantee you that no ruling party will survive the IMF bailout so maybe this i guarantee you that the IMF won’t intervene politically but instead their bailout could kill the ANC forever. The ANC will not know how to survive once the austerity programmes are in place from the IMF

The sickness of socialism is hereditary and will continue to hold Africa back

No, they’ll do the exact opposite of economic reforms and go after every piggy bank, from pensions to the R5 coin at the back of the sofa, to fund further looting.

The ANC has 57% of the vote in the bank. They are already falling asleep till the next election. CR will try to muddle through. There is no sense of urgency.

How did we get here? A lack of voter education. The electorate has failed to keep the government accountable.

For hundreds of years the majority of voters had no experience of democracy, elections or voting. Just as the liberation parties want it. This enable the liberation parties to “capture democracy”.

An IMF bailout is not the better solution to our problems, as some people think. Picking up the phone and calling the IMF is the last thing people do – only when there is no other option or way out do you call them. It also requires that our rulers eat humble pie – and it will be a massive humiliation – socialists will have to concede defeat to the capitalists. So expect a revolution before we ask for the bailout. Expect every penny to be gone when the IMF loan comes through.

In the mean time the looting will pick up pace as people try to get out with what they can. The older people have seen this kind of behaviour before, in some cases twice. The story is very familiar for those with long memories.

Neither is it a scare tactic. The South African economy have patiently and regularly communicated its problems to us over the years. It have never managed to scare us. The reaction has always been talk, planning a plan, making bigger promises about stuff than before, and even crazier policy announcements. South Africans it seems cannot be scared into action. It means we are either really tough SOBs, or we are truly ignorant of what is peeking around the corner.

Sorry for being so glum on a Tuesday morning…

Milo, you’re not glum or negative….you’re merely a realist 🙂

Agree with comments. Magnus Heystek once said S’Africans seem to be extremely complacent considering the country’s dire economics.

As one or more commentators said, an IMF rescue is still very far off. This is (typically) the sequence of events for most 3rd world countries (which SA is one) facing a fiscal cliff without doing real pro-growth reforms:

(i) National savings will be used from Saffas’ huge pension & retirement fund pot (“prescribed assets”). Will start in small % increments, until large portion is depleted

(ii) Going along with above, or perhaps before prescribed assets, or running in unison….attempts will be to access/plunder SARB/Treasury’s National Reserves to help pay for debt.

(iii) The current (generous) R1m single discretionary allowance to be reduced (along with other tighter exchange controls)

(iv) …while higher Income Tax (and wealth tax like CGT) will be increased along the way (…although easier now to dip into Retirement Savings instead..point i)

(v) When the above depleted / leaves little room for maneuvering to pay debt, the captured Reverwe Bank will start to print ZAR notes like stink. ZAR falls = hyperinflation.

(vi) Country (really) on its knees. Loans defaulted on. Taxpayer revolt (of the few still left). State struggle to pay salaries. More rioting. Close to regime change.

(vii) Very little left of country’s economy. IMF now only called for help, after plenty of snot en trane.

In the meantime, the Titanic’s band is still playing great music, so we’ll enjoy it while captain-ZuptANC is drunk. Is it my imagination, or is there a slight listing of ship against horison? Not? Let’s party.
I fear, once Titanic has submerged, many Saffas will have to swim to the nearest island, known as Mauritius.

Just please don’t borrow from China………I can’t believe that they aren’t making offers in the background.

Government is a ponzi scheme..I am sure the ANC cant wait to plunder IMF money.

Mandarin will be the official language of South Africa before the ANC hypocrites go to the IMF.

Corruption is a huge problem but it is not our main problem. Our main problem is that SA is fundamentally a poor country. Before the discovery of diamonds SA was a backwater which only real asset was that it was halfway to India.

Apart from resources SA has never had a true competitive advantage in anything. Our resource bounty is becoming to expensive to mine, gold industry all but finished, platinum demise will be hastened by electric vehicles.

Except for a few niche areas SA agriculture is marginal at best which makes the whole land debate even more ludicrous.

Poor quality math and science education, first through Bantu education and continued by the current lot, means that we are not competitive in manufacturing. Being far removed from most markets does not help either.

Poor education and the lack of high speed internet has largely precluded us from being competitive in tech.

We desperately need to come up with ideas how to grow the economy without the commodity windfall that has carried us for the past 150 years.

The notion that if we get rid of corruption all will be hunky dory is false. Corruption just adds insult to injury.

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