The body, which supports the financial industry in the prudent management of risks, said it had identified South Africa as an emerging market facing a combination of an overvalued currency, heavy positioning, and a sizeable current account deficit.
Tariq Khan, research analyst at the IFF, said South Africa's high external debt posed vulnerability on the current account deficit more than offsetting a benign trade balance as well as the core of heavy positioning and high external amortisation relative to reserves.
“This particular risk is partly mitigated by large external assets in the private sector, which could serve as a source of inflows in the event of a large depreciation due to regulatory caps on locals’ foreign holdings,” Khan said. “However, the ongoing fiscal deficit issue and a potential downgrade to junk status could further worsen external vulnerability.”
Moody’s last month said it expected South Africa's public finances and debt profile to further deteriorate and economic growth to recover slowly over the next two years. The credit rating agency warned that a downgrade could follow if state debt rose.
The South African Reserve Bank quarterly bulletin also showed that the deficit on the current account of the balance of payments narrowed significantly to 2.2percent gross domestic product (GDP) in the fourth quarter of 2018. However, on an annual basis, the deficit widened from 2.5percent of GDP in 2017 to 3.5percent of GDP in 2018. Bureau of Economic Research economist Hugo Pienaar said: “We are a country that does not save enough - we run persistent current account deficits and we need some form of attractive yields to finance the current account deficit.”
Government debt and total contingent liabilities have doubled in terms of GDP since fiscal year 2008, reaching 53percent and 15percent of GDP in fiscal year 2017, respectively.
Capital Economics economist John Ashbourne said he expected domestic demand to lift in 2019, causing the shortfall to widen again.
“Disruptions in the agricultural sector are fading, and we think that improved business confidence will boost private sector investment after this year's election. Stronger growth will cause boost import demand, and widen the current account deficit to about 3.5percent of GDP, which was its level over 2018 as a whole,” Ashbourne said.