This is in part due to a slowing in capital flows to emerging markets, which was driven by the search for yield and had driven flows to higher yielding emerging market bonds from developed market bonds, such as those of Japan, Germany and Switzerland, that had negative yields.
The IMF found that about one-third of the 1.5 percentage points pick-up in the average growth rate of income per capita since 2005, relative to the 1995-2004 period, could be attributed to stronger capital inflows.
In addition, demand for exports from other emerging markets and developing economies also exerted a complementary force on these economies’ medium-term growth.
Beyond the numbers, the influence of the external environment has extended to the nature of their growth process.
Several of these economies have experienced episodes of growth accelerations and reversals with sustained changes in growth rates.
These episodes appear to have a long-lasting effect on the level of income per capita.
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The IMF concluded that favourable external conditions increase the likelihood of growth accelerations and lower that of reversals, which is why it has been reassuring that foreign investors remain net buyers of South African bonds since March 27, 2017, when the rand was trading at R12.31 to the dollar, before the recall of former finance minister Pravin Gordhan.
The IMF noted that emerging market economies like South Africa have enjoyed exceptionally favourable external conditions over long stretches of the post-2000 period, such as the commodity super boom, which resulted in strong external demand, relatively abundant capital inflows, and higher growth and better investment returns relative to developed economies.
Over the past few years, however, the external environment has become more complicated for these economies.
The slow recovery from the 2008/9 global financial crisis has weakened demand for emerging market and developing economy exports, which was reflected in softer commodity prices.
This was largely driven by less demand from China, as it rebalanced its economy toward consumption and services and away from materials-intensive fixed investment.
The IMF warns that some of these shifts to a weaker impulse from the external environment may persist.
Additional elements in the global policy mix are a risk of protectionism in advanced economies, and a general tightening of external financial conditions as the US Federal Reserve increases its policy rate.
Emerging market and developing economies are therefore likely to experience a weaker growth impulse from external conditions than in the past, so emerging market economies such as South Africa need to focus more on encouraging domestic demand.
Despite this more complicated environment, the IMF remains optimistic about future growth, with 2016 seen as the low point in the recent growth cycle, with better growth forecast for this year and the years beyond.
The IMF believes that emerging market economies can still get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks, protecting trade integration, permitting exchange rate flexibility, and containing vulnerabilities from high current account deficits and large public debts.
In the South Africa context that means staying the fiscal discipline course, promoting inter-African trade by implementing one-stop border posts, as well as taking advantage of the weaker rand to boost exports.