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Are the rumours about an IMF bailout for South Africa true?

by , 07 August 2019
Are the rumours about an IMF bailout for South Africa true?
It's all over the news…

“Why SA is on the verge of an IMF bailout” - Business Live

“Is an IMF bailout for SA imminent” - News 24

“Does SA need help from the IMF?” - eNCA

Prominent billionaire and business man, Johann Rupert has even suggested this. According to a Business Live report Rupert said an IMF bailout is “a serious possibility”, while Paul Harris, one of the three founders of FirstRand and director of RMB believes it would be a ‘black swan' event.
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So what is an IMF Bailout – and what would it mean for SA?
 
According to Investopedia: “A bailout is the act of a business, an individual, or a government providing money and resources to a failing company. These actions help to prevent the consequences of that business's potential downfall which may include bankruptcy and default on its financial obligations.”
 
So – in the context of South Africa and the IMF it would mean trouble. Simply put it would mean SA no longer has the ability to repay interest on the debt we owe – and that our government asks the IMF (International Monetary Fund) to loan us money to keep our finances afloat.
 
An IMF ‘bailout’ comes with strings attached. The IMF’s reasoning is if a country needs a bailout it is because things have been mismanaged. Hence the country would have to agree to terms and conditions for the loan.
 
Based on things pointed out in the past by the IMF, the World Bank and historian RW Johnson (who also predicted an IMF bailout for SA) the IMF will require the SA government to do four things in return for a loan: 
 
1. Improve the education system – SA’s education system is broken. Teachers are not properly empowered, training and resources in rural and township areas are lacking and the standard of our education is dropping.
 
2. Liberalise labour laws – Laws and regulations should make it easier for employers to both hire, fire and discipline employees, and to import skills needed in the country.
 
3. Cut the fat civil service – SA’s government employees (and that of SOEs like Eskom and SAA) wage bill is too fat. Simply put we have too many, overpaid state employees doing too little. Government needs to cut its wage bill to get its finances in order again.
 
4. Fix ailing State owned enterprises – Eskom, Denel, SAA, SABC are all in big trouble. If Eskom fails, SA goes under. If Eskom doubles electricity prices to survive – SA goes under… Simply put all SOEs need serious restructuring and fixing up. The IMF knows this and will certainly impose strict rules regarding restructuring of these on the SA government.
 
Long before SA needs an IMF bailout this will happen
 
Long before SA needs an IMF bailout we’ll see government look for funds elsewhere.
 
That is pension funds…
 
You see, South Africa’s pension funds total around R4 trillion in assets.
 
That is roughly equal to our entire GDP, and almost double current government debt.
 
That means if government diverts more cash from pension funds to government debt it can ‘solve’ its problems (or that is the thinking at least)…
 
The ANC have hinted towards this – as it has also indicated that there is no chance it will allow government to lose its ‘sovereignty’ to IMF rules and restrictions.
 
So, before SA needs an IMF bailout it will first force the Public Investment Corporation, managing government employee pension funds, to invest more cash in government debt.
 
Then it will likely force changes to Regulation 28 – which regulates how much and where pension funds can invest. Government could easily force a minimum investment in government bonds on funds to get access to more capital.
  
Does South Africa need a bailout though?
  
Unemployment recently hit a high of 29%.
 
R70 billion in foreign investment flowed out of the JSE and bonds in SA in the first two quarters of 2019.
 
This definitely does not create a rosy image…
 
Government debt sits at 55% of GDP – including SOE’s this figure would likely be around 80%.
 
That’s bad – but not yet a train smash. It can be turned around with immediate action.
 
In fact, there are signs that SA’s economy is showing green shoots of a recovery.
 
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Signs of SA’s pending economic recovery
 
I’m sure you’ve experienced it as well – things seem to take a turn for the better, just for a politician to do something stupid and the SA economy goes off the rails again.
 
However under reforms being implemented by the Ramaphosa government my optimism is at least better than it was with Zuma…
 
Latest news point towards a second quarter 2019 economic recovery: 
 
Retail sales in May beat estimates – rising 2.2% year on year – forecasts according to Bloomberg was 1.7%. April sales was also revised to 2.7% (January to March figures were 1.4%, 1.4% and 0.1%).
 
Vehicles sales recovery – April vehicle sales dropped to 36,787 vehicles after an average of 44,423 in the first three months of the year. May and June saw a recovery to 40,430 and then 45,940 vehicle sales.
 
Trade volumes are increasing – According to a StatsSA report the volume of goods transported (payload) increased by 3,0% in May 2019 compared with May 2018. The corresponding income increased by 2,4% over the same period. Income from freight transportation increased by 3,1% in the three months ended May 2019 compared with the three months ended May 2018.
 
Tourism figures are improving - Total income for the tourist accommodation industry increased by 4,0% in May 2019 compared with May 2018. Income from accommodation increased by 4,8% year-on-year in May 2019.
 
Lower interest rate and steady inflation – Inflation is steady and expected to come in at 4.8% for 2019 (if the rand holds). The Reserve Bank lowered interest rates with 0.25% in July – and this should prove a small boost to grow by freeing up disposable income for consumers.
 
These economic indicators however mean nothing if they don’t flow through to growth in the bottom line of listed companies.
 
So, in coming months we’ll see if President Ramaphosa’s “New Dawn” materialises with growth coming through – or if we head further towards trouble.
 
But for now I can say we are not yet in need of an IMF bailout…
   
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Francois Joubert,
Editor, Red Hot Penny Shares 
 
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