20 June 2008

South Africa: Current Account Gap At R195bn Weighs On Rand

Johannesburg — THE deficit on the current account, its broadest measure of trade in goods and services, widened to a record R194,6bn in the first quarter, signalling that the rand will become more vulnerable to shifts in the mood of global investors.

The Reserve Bank said yesterday the shortfall leapt to 9% of gross domestic product (GDP), the largest in 26 years, as oil imports soared and dividend payments on local assets held by foreigners climbed.

Foreign investment in stocks and bonds, which have provided most of the finance for the deficit in the past few years, swung into negative territory for the first time since 2005, with an outflow of R19,4 bn.

"We now sit with a deficit that even for an emerging market country like SA is huge," said Citadel economist Salomi Odendaal. "We expect it to remain rather large. If international investors have any doubt about SA being able to finance it, this can really put huge pressure on the currency and interest rates."

The rand has weakened by nearly 17% against a trade-weighted basket of currencies so far this year in a trend that stokes inflation by making imports more expensive.

Further depreciation could prompt more hikes in interest rates, which have already climbed five percentage points in the past two years, curbing economic growth.

News that the current account deficit had widened sharply from R158bn, or 7,5% of GDP, in the fourth quarter of last year did not shake the rand.

This was because Reserve Bank Governor Tito Mboweni muted the potential shock to markets by revealing the main figure last week, when the Bank raised its key repo rate by half a percentage point to 12%.

Details in the Bank's June quarterly bulletin yesterday showed that a surge in foreign direct investment to R40,6bn helped cover the shortfall in the first quarter of this year.

But it pointed out the rise from R13,4bn in the previous quarter was due mainly to the purchase of a 20% stake in Standard Bank by a Chinese bank.

The current account deficit was also funded by a big leap in foreign deposits with SA's banks, which the Reserve Bank says may stem from the yield appeal of SA's higher interest rates. But this sort of inflow is known as "hot money" due to its volatile and short-term nature.

SA's overall balance of payments shrank to R6,8bn in the first quarter from R16,1bn in the previous quarter, the Bank said.

"We expect very little respite for the balance of payments, if any, in the near term," said Absa Capital economist Monale Ratsoma.

"Although the financing has so far been adequate, the outlook is not as comforting. For the rand, developments suggest increased vulnerability to any shifts in investor sentiment."

SA's trade deficit nearly tripled to R61,4bn in the first quarter of this year, in a trend set to stay, due to the rising cost of oil imports and spending on capital goods for the government's big infrastructure spending programme.

On a positive note, the bulletin showed overall spending in the economy surged 14,2% in the first quarter from a virtually flat 0,2% in the previous quarter. That was due mainly to government spending and investment, which is taking up the slack from consumer spending, a healthy trend for the economy. Investment growth accelerated to 14,7% from 14,1%, taking its share of total GDP up further to 21,5%, closer to an official goal of 25%. Household spending slowed to 3,3% from 3,8% as higher debt costs continued to bite. This helped curb growth in disposable income to 2,7% from 3,3%, its slowest pace since the last quarter of 2002.

Household debt as a ratio of disposable income edged up to 78,2% from 77,6%, a new record. This pushed debt service costs up to 11,3% of disposable income from 10,9%, another sign of mounting strain on SA consumers

"Overall, the bulletin points to an economy and a currency vulnerable to poor current account funding and stress in the household sector, but helped by strong investment," said Peter Attard Montalto, emerging market analyst at Lehman Brothers.

He predicted the current account deficit for the whole of this year could amount to 9% of GDP, up from 7,3% last year, its highest level since 1951, when it amounted to 10,1% of GDP.

With Reuters

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