World Bank underlines risks to SA of tapering, commodity pullback

The World Bank has added its voice to those warning that South Africa is at risk from any disorderly increase in interest rates, which could accompany the inevitable tapering of quantitative easing measures.

In its October Africa Pulse publication the bank says South Africa is particularly vulnerable to capital-flow movements, since debt-creating flows finance around 80% of the country’s current account deficit.

Released only days after the International Monetary Fund cautioned that any prolonged halt to capital inflows into South Africa had the potential to precipitate a disorderly adjustment of the country’s fiscal and current account deficits and even trigger a recession, the semi-annual World Bank report says South Africa’s strong links with global financial markets amplify the risk.

“Although recent statements by the [US Federal Reserve] indicate a continuation of its quantitative-easing measures, the inevitability of tapering and the subsequent rise in base interest rates and spreads still remain,” the reports states.

Econometric evidence suggests that developing-country interest-rate spreads rise when base rates increase, with a recent World Bank study suggesting that a 100-basis-point increase in high-income-country base rates is associated with a 110-to-157-basis-point increase in developing-country yields.

Acting chief economist for Africa Francisco Ferreira also urged authorities in resources-rich African countries to begin preparing for the prospect that commodity prices, the increase of which has provided a growth “tailwind”, could weaken.

On a year-to-date basis, metal prices have declined sharply, owing to persisting large stocks, steady increases in supply, and weaker demand from China, which accounts for about 40% of global metal consumption.

The bank also published the results of two separate simulations outlining the impact of either oil or a metal price shocks.

The results of the oil price simulation, which represent a $30 decline in oil price over the baseline level, show that among developing regions, sub-Saharan Africa is the most impacted, with gross domestic product growth declining by some 1.3 percentage points and current account balances worsening by 4.5 percentage points in 2014 compared with baseline projections. Oil importers, however, would benefit.

As with the oil price simulation, the results of the metal and mineral price simulation show the metal and mineral exporters in the region, such as Botswana, the Democratic Republic of Congo, Ghana, Mozambique and South Africa, being the worst impacted.

Notwithstanding the risks outlined, the bank anticipated that growth for sub-Saharan Africa would rise by 4.9% in 2013 and pick up to 5.3% in 2014 and 5.5% in 2015.

One of the report’s co-authors Punam Chuhan-Pole says that if slow-growing South Africa were to be excluded, growth for the rest of the region in 2013 would be 6%.

The outlook for South Africa also remained subdued, a reality confirmed by Finance Minister Pravin Gordhan who says that economic growth will not reach the National Treasury’s earlier estimate of 2.7%, but will not fall below 2%.

Gordhan will update government’s official growth outlook when he delivers the Medium-Term Budget Policy Statement on October 23.

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