Deficit fillip stirs hope
Reserve Bank may cut interest rates later this year despite global risks to rand
SOUTH Africa’s current account deficit has fallen unexpectedly steeply, supporting a stronger rand and adding to hopes in the market that the Reserve Bank might start cutting interest rates later in 2017.
But economists are divided, with many expecting that the bank, whose monetary policy committee meets next week, will remain cautious in the light of political and global risks to the rand and the inflation outlook.
They will be updating forecasts following the release on Wednesday of the bank’s Quarterly Bulletin and of Statistics SA’s consumer price index inflation figures, which showed inflation declining to 6.3% in February, in line with market expectations, from 6.6% in January, with food inflation falling to just less than 10%.
Absa Capital economist Peter Worthington said that although inflation would fall to within the bank’s 3-6% target range in the second quarter, it would stay close to the top of the range.
“The market can get quite excited about the idea of rate cuts as it sees headline and core inflation coming down but the Reserve Bank is looking 18-24 months out and none of the conditions are in place for a more lasting fall in inflation to the middle of the target range,” Worthington said.
“The bank is going to be very cautious of further Fed rate moves and the December elective conference in SA.”
The event risk has raised question marks over how sustainable the strength of the rand is. It has reached multi-year highs in recent weeks.
On Wednesday it jumped briefly again after the quarterly bulletin showed the deficit on the current account of the balance of payments fell to a much better than expected 1.7% of GDP in the fourth quarter of 2016, as higher commodity prices boosted exports, a weak economy dampened imports and dividend flows from abroad rose.
For 2016 as a whole the deficit on the current account, which includes both trade in goods and cross-border service and income payments, came in at 3.3%, down from 4.4% in 2015.
Quarterly current account deficits of 1.7% or less were last seen when commodity prices rallied in 2010-11. But the improved trade balance was also because of lower imports that reflected a weak consumer and very weak demand for imported investment goods, in a year in which investment spending declined 3.9%, with private investment crashing 6% during 2016.
The head of the bank’s balance of payments division, Linda Motsumi, said the balance on the trade account had swung from a 0.2% deficit in the third quarter of 2016 to a 1.3% surplus in the fourth quarter, while the services account deficit had come down from 3.6% to 3%.
The services account benefited from record high tourism revenues as well as an increase in foreign dividends paid to SA investors with assets abroad. A high current account deficit has meant that SA has been very dependent on inflows of foreign capital to finance the shortfall, making it vulnerable to volatile global market sentiment.
Those inflows, on the financial account of the balance of payments, continued in 2016 but at a lower level, sliding from 5% of GDP in 2015 to 3.8% in 2016.
“It’s happy days for the current account,” said Standard Bank economist Kim Silberman, who expects that the current account will continue to compress in the first quarter of 2017 and will average 1.8% for the year, though this is below consensus.
Stanlib economist Kevin Lings said the ongoing risk of a credit rating downgrade, coupled with changes in global risk appetite, were likely to keep the rand volatile in 2017. — TMG