BUSINESS MAVERICK ANALYSIS

No IMF bailout in the near future, say (some) analysts

By Ed Stoddard 13 August 2019
Caption
Finance Minister Tito Mboweni (Photo: Leila Dougan)

Is South Africa about to go on bended knee to the IMF, triggering years of austerity and populist politics? There seems to be a growing consensus that it is, but there are dissenting voices out there. They note that South Africa is not on the verge of a balance of payments crisis and that its debt levels are underpinned by long-term issuance and deep liquidity. That doesn’t mean policymakers should be complacent.

The International Monetary Fund (IMF) recently had the following to say about a struggling economy: “Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss-making SOEs, amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.”

It sounds like the fund is talking about South Africa, where urgent policy action is needed to address structural challenges that remain “largely unaddressed.” It might be a stretch to describe the South African Revenue Service (SARS) as “chronically weak,” though admittedly it lost a lot of its administrative capacity during the Zuma years. But the business environment is certainly difficult, state-owned enterprises (SOEs) are inefficient and loss-making, and the informal sector is large. And our growth prospects are hardly meeting the needs of a population that is fast growing.

The IMF, however, was not talking about South Africa – it was talking about Pakistan, which in early July signed a $6-billion loan with the fund to head off a balance of payments crisis. The fund’s concerns regarding Pakistan certainly sound like they could be applied here. But some analysts say South Africa is not remotely in Pakistan’s league and talk about Pretoria being on the verge of an IMF bailout is hyperbole.

The idea that South Africa might have to go to the IMF remains one with very little substance, whatever the attention it has been getting locally. Countries typically require IMF programmes when some sort of external rebalancing is required. This is not the case for South Africa,” Razia Khan, chief economist, Africa and Middle East for Standard Chartered Bank, told Business Maverick.

A balance of payments crisis is often the trigger for an IMF bailout. This effectively happens when a country does not have adequate foreign exchange to pay for imports or cover its foreign debt obligations. Pakistan was down to $7.3-billion in foreign exchange reserves, less than two months’ worth of import cover. South Africa’s forex reserves, by contrast, stand at almost $44-billion, which is around five months’ worth of import cover. That is not a big cushion, but is hardly a crisis at this stage. And pressure on reserves usually occurs when an exchange rate is managed. Pakistan had a managed exchange rate, which is not the case with South Africa.

Pakistan’s economy was also “overheating” – it had been growing at an unsustainable rate, with mounting inflation pressures. This hardly begins to describe South Africa.

Capital flight is another concern – and if it is massive it can bring about an IMF-scale crisis – but South Africa’s exchange controls mean that the flow is likely to more of a gradual leak than a sudden and unsustainable surge.

Then there is the question of debt and fiscal constraints. “The fiscus is under-performing but not near a cliff-related incident – as such (and for a whole host of other reasons too) South Africa is nowhere close to needing an IMF programme…We profoundly disagree with the view that the IMF is immediately on the agenda,” Peter Attard Montalto, head of capital markets research at Intellidex, wrote last week in a note to clients.

Among other things, Montalto notes the long-term structure of South Africa’s debt – bondholders are not about to start knocking down the doors tomorrow – and sees investor demand for increased issuance.

Given the poor performance on equities (which is expected to continue) we think bonds look broadly fair value and will move to be somewhat cheap as this process goes on so as to attract asset reallocation from equities.”

South Africa’s debt to GDP ratio is seen going well north of 60% in coming years and perhaps even higher given the mess that is Eskom. But, as Khan points out: “South Africa’s FX-denominated public debt is relatively small, less than 10% of total debt. While its debt ratio may be pressured as a result of years of weak growth and, now, the Eskom bailout, a high debt-to-GDP ratio is NOT the reason why countries need IMF assistance. South Africa has deep and liquid domestic markets, with the ability (should it want to), to borrow more long-term, as well as to increase borrowing externally.”

Then there is the aversion of the governing ANC to an IMF bailout – the last time Pretoria went to the fund was in late 1993, months before the elections that ushered in the democratic era. Part of the fiscal drive under former president Thabo Mbeki, when budget deficits were kept low, was the desire to remain out of the clutches of the IMF.

In his biography of Mbeki, The Dream Deferred, Mark Gevisser wrote that: “Mbeki was determined to prove to the mandarins of global capitalism that Africans could play them at their own game, and compete within a modern, global economy, without becoming indebted to them.”

And the ANC seems determined to remain out of the IMF’s sphere of direct influence. Asked last week if the cabinet was considering going to the IMF, Minister in the Presidency Jackson Mthembu said: “No. There is no appetite and no need [for an IMF bailout].” Politically at least there is certainly no appetite.

The IMF could well find negotiating a programme very challenging with South Africa, given the delineation of responsibilities around Cabinet and the ideological blockages within it as well as the ANC pleading (unwarranted) exceptionalism for the fund to give a light touch,” Montalto told Business Maverick.

So Finance Minister Tito Mboweni may not be going cap in hand when he heads to Washington in October for the big IMF annual meeting. That does not mean that such a day of reckoning may not visit us at some point in the not too distant future and that urgent action is not needed to get the economy on the right track.

The fiscal outlook is a concern in South Africa. This will necessarily mean measures to limit spending, to spend more efficiently, and to raise revenue (as well as reforms to boost growth). None of these reforms requires the IMF to be involved,” said Khan.

IMF or no IMF, South Africa is still on a depressing trajectory with no easy options. It is also depressing to look at some of the data sets from economies that have been forced to go to the IMF recently. When Argentina went to the fund in 2018 for a whopping $50-billion bailout, its unemployment rate was 8.5%. Pakistan’s was below 6%. South Africa’s now stands at 29%.

This underscores the depth of the South African tragedy. IMF bailouts often herald tough periods of austerity, with contracting economies and rising unemployment and poverty levels – which was the case with Greece. But this is already the harsh reality for many South Africans – unemployment and growing poverty. Even if South Africa staves off an IMF programme and manages to elevate borrowing levels, it may not make much of a difference to millions of South Africans, who already know all about the economic misery often associated with IMF-induced austerity. This may explain why South Africa’s chattering classes are so worried about the prospects of an IMF bailout – it is not a pain they want to share. BM

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