South Africa’s current account deficit points to rand weakness

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By Kevin Lings

In January 2008, South Africa’s trade account recorded another large deficit of R10.2 billion. The market was expecting a deficit of around R8 billion, although the trade balance is notoriously difficult to forecast.

During January 2008, exports fell by a substantial 7.6%, while imports rose by a significant 13.1% m/m. The increase in imports included a R1.5 billion increase in mineral imports (oil), as well as a R0.8 billion increase in machinery imports and a R1.2 billion rise in vehicle components. The decrease in exports was mostly related to mineral products, including gold, diamonds and platinum, which would partly include the impact of the electricity outages. Hopefully the higher prices will benefit mineral exports in the months ahead, assuming there is no sharp increase in power outages. The exports of motor vehicles also declined. The cumulative trade deficit for 2007 as a whole was R68.6 billion versus a deficit of R66.8 billion in 2006.

The monthly trade data are very erratic; therefore it is important to review the trade account on a trend basis. Over the past 12 months the trade balance has averaged a monthly deficit of R5.8 billion compared with an average deficit of R5.7 billion in 2007 and R5.6 billion in 2006 (see chart below). Normally the trade balance is better in the first half of the year than in the second half.

The trade account has recorded a deficit in 24 of the last 25 months. Importantly, there are signs that consumer activity is slowing (especially motor vehicle purchases) and that fixed investment spending will not experience as much growth as last year. This should be reflected in a modest improvement in the trade balance in 2008. However, South Africa’s current account deficit remains substantial. In Q3 2007 South Africa recorded a current account deficit equivalent to 8.1% of GDP compared with a deficit of 6.4% of GDP in Q2 2007 and 6.8% of GDP in Q1 2007.

All of this raises significant concerns about the potential for further currency weakness, especially when one considers that South Africa’s credit risk spread has widened appreciably in recent months. The increased capital flows to South Africa in recent years have really been part of a dramatic increase in developed-market capital flows to emerging markets. These flows not only reflect the global search for yield, but also the improving economic fundamentals within most emerging markets. These include higher sustained growth, ongoing fiscal discipline and fiscal credibility, undervalued exchange rates, managed inflation rates, low foreign debt, improved credit ratings and a generally more friendly business environment.

Unfortunately, for South Africa many of these fundamentals have deteriorated somewhat in recent months. We expect this deterioration to be temporary, but it certainly increases the vulnerability of the rand considering the current political uncertainty, electricity disruptions to key industries such as mining, as well as the increased global risk aversion on the back of the US financial crisis and economic slowdown.

SA trade balance – 12 month moving average

stanlib-3-mrt-1f.jpg

SA global risk spread

stanlib-3-mrt-2ff.jpg

SA current account as % of GDP

stanlib-3-mrt-3.jpg

International current account comparison

stanlib-3-mrt-4.jpg

Source: Kevin Lings, Stanlib, March 3, 2008.

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