Econ­omy still in a sticky spot

Business Day - - OPINION -

The size of the sub­si­dies SA pays its South African Cus­toms Union (Sacu) neigh­bours is sure to come up for dis­cus­sion af­ter the re­lease of the lat­est Re­serve Bank quar­terly bul­letin on Thurs­day.

Trans­fers to Sacu were the main rea­son be­hind the sur­prise jump in the deficit on the cur­rent ac­count of the bal­ance of pay­ments in the sec­ond quar­ter.

With the trade bal­ance im­prov­ing, the mar­ket had ex­pected that the deficit would nar­row to 1.9% of GDP, from 2% in the first quar­ter. In­stead, it in­creased to 2.4%.

With­out the Sacu trans­fers — which were the equiv­a­lent of 0.4% of GDP, ac­cord­ing to the Re­serve Bank’s econ­o­mists — the deficit would have been un­changed.

The sec­ond quar­ter was the first quar­ter of the new fis­cal year, and Fe­bru­ary’s bud­get pro­jected an in­crease in the Sacu trans­fers from R40bn to R56bn, hence the hit to the in­come part of the cur­rent ac­count.

The Sacu trans­fers to SA’s neigh­bours are cal­cu­lated in terms of a for­mula but, in essence, this ar­guably is a form of de­vel­op­ment aid that SA pro­vides to its poorer neigh­bours. In coun­tries such as Le­sotho, those Sacu rev­enues can make up half or more of the na­tional bud­get.

A case can be made for them. SA’s pros­per­ity is linked to that of its neigh­bours, and while they do lift the cur­rent ac­count deficit, that is prob­a­bly less im­por­tant now that the deficit is down to the 2% range.

Sadly, the cur­rent ac­count deficit has come down in the past cou­ple of years more be­cause im­ports have fallen in a very weak econ­omy than be­cause ex­ports have done par­tic­u­larly well. How­ever, SA’s cur­rent ac­count deficit still puts it in con­tradis­tinc­tion to other emerg­ing mar­kets that run sur­pluses.

For now at least, in­ter­na­tional in­vestors seem to be so ob­sessed with the search for yield that idio­syn­cra­sies such as a coun­try’s cur­rent ac­count deficit do not seem to con­cern them too much.

As the quar­terly bul­letin shows, SA ben­e­fited from strong port­fo­lio in­flows that jumped to R65bn on a net ba­sis in the sec­ond quar­ter, from R7.5bn in the first quar­ter, and the largest chunk of this was for­eign in­vestors buy­ing South African bonds.

Those cap­i­tal in­flows helped to fund the coun­try’s cur­rent ac­count deficit.

But there are warn­ing bells in the bal­ance of pay­ments num­bers. While volatile port­fo­lio flows in­creased, other kinds of cross-bor­der in­vest­ment – par­tic­u­larly for­eign di­rect in­vest­ment – showed net out­flows and the Re­serve Bank re­ported that, over­all, the net in­flow of cap­i­tal had de­clined (from R37bn to R3bn).

A cur­rent deficit re­ally means SA is spend­ing more than it pro­duces and in­vest­ing more than it saves, mak­ing it de­pen­dent on con­stant for­eign in­flows for fi­nanc­ing.

This re­liance on volatile port­fo­lio flows makes SA ex­tremely vul­ner­a­ble to shifts in in­ter­na­tional sen­ti­ment re­gard­ing emerg­ing mar­kets or to SA’s own is­sues — and to the kind of out­flows that could re­sult from fur­ther credit rat­ings down­grades, for ex­am­ple.

And if in­ter­na­tional in­vestors are re­luc­tant to come into SA on a longer-term ba­sis, be­cause of its pol­icy un­cer­tainty and poor growth prospects, so too are do­mes­tic in­vestors.

As the bul­letin shows, do­mes­tic in­vest­ment spend­ing (mea­sured by gross fixed cap­i­tal for­ma­tion) de­clined again in the sec­ond quar­ter, which means it has now been neg­a­tive for four of the past six quar­ters, and par­tic­u­larly dis­turb­ing is the fact that pri­vate sec­tor in­vest­ment spend­ing was down nearly 7% dur­ing the quar­ter.

So, while the econ­omy showed some bounce in the sec­ond quar­ter, there’s lit­tle sign of a mean­ing­ful up­turn.

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