/ 1 September 2023

SA could face GDP hit as world economy splinters, says IMF


Geo-economic fragmentation stands to inflict a 5% of GDP hit to South Africa’s economy, according to Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF).

Gopinath was addressing the South African Reserve Bank’s biennial conference, where central bankers and economists have gathered to discuss monetary policy in the wake of the Covid-19 pandemic-induced crisis. 

As emerging markets struggle to claw back growth, in the wake of high interest rates, rising geo-economic fragmentation is expected to make conditions even tougher, Gopinath said.

“The pandemic and Russia’s war in Ukraine have raised legitimate concerns about supply chain security and broader national security. And indeed, policymakers should act to improve their economic and financial resilience,” she said. “However, it must be acknowledged that increased resilience comes with a cost.” 

More disturbingly, Gopinath added, there has been an increase in policy actions around the world that, if continued, “pose a serious threat to global prosperity”. 

South Africa recently got a taste of what this fragmentation could mean for the economy, when the country’s inclusion in the African Growth and Opportunity Act was put in jeopardy as Washington questioned its non-aligned stance on the Russia-Ukraine war.

Trade restrictions spike 

Gopinath noted that trade restrictions have picked up sharply since the pandemic and Russia’s war on Ukraine. Almost 3 000 restrictions were imposed in 2022 alone. That is nearly three times the number imposed in 2019.

Moreover, foreign direct investment is now increasingly driven by geopolitical preference rather than geographic distance. “All of this points to an increasingly fragmented world.”

Only a handful of emerging markets will benefit in the wake of this fragmentation, Gopinath said — and most will lose. Although South Africa could endure a hit of 5% of GDP, other emerging markets could face output losses of more than 10% of GDP, according to the IMF’s simulations.

Foreign direct investment fragmentation would add to these costs, Gopinath added. Because foreign direct investment from advanced economies offers access to better technologies and know-how, emerging markets would be hit hardest. 

“Fragmentation also makes the world more vulnerable to shocks, as it leaves countries with fewer trading partners,” Gopinath noted, adding that the IMF’s simulations show that a negative supply shock in the US production of wheat would raise its price by about twice as much as it would in an integrated world.

“In this fragmenting world countries are also turning inwards and engaging in large-scale industrial policies,” Gopinath said. “In 2023 alone, the number of such measures that also restrict trade has increased nearly sixfold.”

Most of the increase in protectionist policies is in advanced economies, Gopinath noted. 

Interest rates 

Meanwhile, the IMF expects global interest rates to remain high for quite some time. There are reasons to think that rates may never return to the era of “low for long”, Gopinath said.

The South African Reserve Bank’s conference comes just weeks ahead of its monetary policy committee meeting in September, where it will decide whether the country’s borrowers will get some relief or continue to endure high interest rates. Although the recent fall in domestic inflation might signal a cut, economists are forecasting that the Reserve Bank will instead keep interest rates in restrictive territory until at least next year.

Gopinath stressed that, in the face of continued economic volatility, emerging markets should strengthen their macro-fundamentals. “Reinvigorating structural reforms can help strengthen governance, labour markets and product markets and develop human capital, all of which are crucial. But contending with these new challenges requires going a step further,” she said.

“Mobilising domestic resources, enhancing resilience to fragmentation and implementing a fiscally and socially sustainable climate strategy can help.”

Gopinath acknowledged that these problems may be daunting, but said they come with vast opportunities.

“South Africa embodies this potential. With its abundant natural endowments and strong institutions, this country is poised for a growth take-off — if reforms that resolutely and courageously tackle structural obstacles are implemented,” she said, adding that the reforms may prove difficult and only pay off much later.