International Monetary Fund agrees with Treasury that risk of “populist pressures” is overstated and endorses government’s countercyclical fiscal policy
CAPE TOWN — The International Monetary Fund (IMF) does not share the view of ratings agency Moody’s that there is a significant risk that state spending will spiral out of control and raise SA’s debt burden to unsustainable levels.
Moody’s lowered the outlook on SA’s sovereign credit rating from stable to negative last week, citing, among other things, worry over political risk and possible changes to the fiscal framework.
The agency said populist pressure and tension within the ruling African National Congress (ANC), and between it and its alliance partners, could undermine the Treasury’s commitment to low budget deficits and debt targets.
But IMF assistant director for Africa Abebe Selassie — who, with a team of economists, is on a mission to SA to prepare the multilateral organisation’s new report on the economy — dismissed these concerns.
He endorsed the government’s countercyclical fiscal policy, which he said had proved very supportive of the economy.
However, of concern to Mr Selassie was the decline in competitiveness of local manufacturers due to rising production and labour costs, which had contributed to slower growth.
The Treasury also believed Moody’s “overplayed” its concern about SA’s political risk, and said last week there were no indications of a change to the fiscal framework. Rival agency Standard & Poor’s was also not worried about SA’s rising debt trajectory.
Mr Selassie stressed in a briefing to Parliament’s finance committee yesterday that the government would have to rein in spending to contain debt, which is projected to rise from about 27% of gross domestic product in 2009 to 40% by 2015.
Debt service costs, the fastest- growing item of state spending, are expected to reach R115bn by 2015 from R76,9bn this year.
The government has committed itself to raising real noninterest expenditure by only 2,3% a year over the next three years, against an average 7,9% over the three years to end 2011-12.
If this were achieved, “strong prospects” existed of debt being contained, Mr Selassie said.
Asked after the meeting whether political pressures on state spending were overwhelming, he said: “No, I don’t think the pressures are overwhelming.
“There is a recognition of the need to moderate spending growth. I think the government’s document (the medium-term budget policy statement) reflects a consensus view in government that spending growth going forward has to be more restrained than in the past.
“It is a very domestic, very political decision. I think that is what government has decided and I think it is a very sound decision,” Mr Selassie said.
The IMF has lowered its growth forecast for SA to 3% this year and 3% next in the light of the global and domestic slowdown.
“Of course, if the euro zone goes into recession and the global economy slows down much more rapidly than we are projecting, then we will be revisiting our forecasts as some impact on SA is going to be likely,” he said.
“The last time around when the global economy went into recession, SA was hit very hard. There are causes for resilience now … I don’t think there is room for much labour shedding left in the economy,” Mr Selassie said. “Policies are in a supportive vein, but some impact of the global slowdown is almost certain.”
Mr Selassie said while the Congress of South African Trade Unions was correct in saying that labour’s share of national income had declined over the past decade or so, this was not the case in key sectors such as manufacturing, which were at the cutting edge of global competition and had suffered a decline in international competitiveness.
A far greater contributor than the strong rand to the loss of competitiveness and weak export performance was the sharp increases in the cost of production due to electricity prices and unit labour costs rising at a rate higher than the rise in productivity.
The overregulation and overconcentration of the economy had limited competition. “The inefficiency of the product and labour markets has exacerbated the impact of the (global) shocks.”