South Africa Should Prepare for IMF Bailout

Prudence teaches that societies experiencing difficult and uncertain times should hope for the best but prepare for the worst. South Africa should take this lesson seriously. It is facing a serious crisis.

South Africa’s economy is growing too slowly to address its profound challenges of poverty, inequality and unemployment. Social tensions are rising. Business is not transforming quickly enough. The governance and solvency of key state-owned enterprises are collapsing. Government finances are deteriorating. Credit downgrades may limit government access to finance. The institutions of governance are decaying. The complex political situation is paralyzing policymaking, Moneyweb reported.

Countries facing analogous crises of confidence like Nigeria, Poland and Turkey have had to seek IMF support. South Africa can hope that the situation will improve.

But it should also plan for the possibility that it will not and that confidence in the government’s ability to manage its deteriorating financial situation will evaporate. This will lead to both higher borrowing costs and reduced access to financing for the government and state owned enterprises.

It could also lead to state owned enterprises defaulting on their debts and their creditors calling in their government guarantees.

As government loses the ability to fund its operations, it will be forced to turn to the IMF. No one wants an IMF program for South Africa. First, it means the government accepting an outsider, dominated by rich countries, overseeing its economic policies. Second, IMF support will be conditioned on the country agreeing to painful reforms such as:

- Reducing the government’s budget deficit and the current account deficit so that it can meet its financial obligations

- Deregulation and labor market reforms designed to encourage investment.

But if South Africa begins preparing for this possibility it may be able to mitigate its worst effects and be ready to exploit whatever opportunities it creates.