The cur­rent ac­count bal­anc­ing trick

Im­prov­ing the sav­ings rate should be a na­tional pri­or­ity

Finweek English Edition - - Economic trends & analysis - BY JAC LAUB­SCHER jac.laub­scher@san­

THE POINT OF FO­CUS of the SA Re­serve Bank’s Quar­terly Bul­letin for March 2007 was the an­nounce­ment of the cur­rent ac­count deficit for fourth quar­ter 2006.

The Bank’s in­ten­tion was to pre­pare the mar­ket for a poor fig­ure, and mar­ket play­ers – es­pe­cially the for­eign ex­change mar­ket, where short po­si­tions in the rand were the or­der of the day – could there­fore po­si­tion them­selves ap­pro­pri­ately.

The Bank’s an­nounce­ment that SA’s cur­rent ac­count deficit in the fourth quar­ter of 2006 had risen to 7,8% of gross do­mes­tic prod­uct there­fore didn’t un­set­tle the mar­ket. In fact, the re­ac­tion of the for­eign ex­change mar­ket was a strength­en­ing of the rand from ap­prox­i­mately US$1/R7,40 be­fore the an­nounce­ment to US$1/R7,20 af­ter it. Ap­par­ently, the mar­ket had there­fore dis­counted an even weaker fig­ure, which re­sulted in a sigh of re­lief all round. Or was it sim­ply a case of profit tak­ing – “sell on the ru­mour, buy on the fact” – as far as the rand was con­cerned?

The Bank had taken care to urge the mar­ket not to re­spond neg­a­tively to th­ese fig­ures, in­ter alia, by em­pha­sis­ing that ex­cep­tion­ally high oil im­ports were an im­por­tant rea­son for the weak­en­ing and, if that were left out of ac­count, the deficit would be less than 5,8% of the GDP.

How­ever, the in­crease in oil im­ports in fourth quar­ter 2006, com­pared with the third quar­ter, was four times greater than the fall in the third quar­ter com­pared with the sec­ond quar­ter – which raises the ques­tion of which por­tion of the in­crease in the fourth quar­ter can in fact be re­garded as tem­po­rary.

Apart from the fact that a deficit of 5,8% of GDP is still a high fig­ure, I have reser­va­tions con­cern­ing the Bank’s wis­dom in try­ing to in­flu­ence the mar­ket’s in­ter­pre­ta­tion of data se­lec­tively in a spe­cific di­rec­tion. There are other fig­ures in the bal­ance of pay­ments sta­tis­tics that also jus­tify com­ment (for ex­am­ple, the pay­ments to neigh­bour­ing states that are mem­bers of the South­ern African Cus­toms Union, where the fi­nanc­ing re­quire­ment is de­bat­able), but the Bank has re­frained from that. Which raises the ques­tion of what the Bank’s agenda is.

You should con­sider the im­ports of crude oil and re­fined prod­ucts to­gether (the lat­ter in the fourth quar­ter, as SA’s re­finer­ies again be­came fully op­er­a­tional) and then the deficit of the fourth quar­ter should have been ad­justed up­ward to al­low for the ex­cep­tion­ally low oil im­ports, to give the full pic­ture.

If you ac­cept the Bank’s ar­gu­ment con­cern­ing oil im­ports, it’s nec­es­sary to use the av­er­age deficit for the third and fourth quar­ters – which was 6,8% of GDP – as an in­di­ca­tion of the un­der­ly­ing trend. That’s also close to the deficit of 6,4% of GDP recorded for 2006 as a whole. In short, SA’s un­der­ly­ing cur­rent ac­count deficit is about 6,5% of GDP.

The state­ment that the deficit on the cur­rent ac­count is fi­nanced by the in­flow of cap­i­tal (in­clud­ing un­recorded trans­ac­tions) is, of course, fac­tu­ally cor­rect but should nev­er­the­less be qual­i­fied.

In the first place, 70% of the deficit in the fourth quar­ter was fi­nanced by un­recorded trans­ac­tions (35% for 2006 as a whole) and not by proven cap­i­tal in­flow. Sec­ond, the fact that for­eign di­rect in­vest­ment made a neg­a­tive con­tri­bu­tion (and for the year as a whole) puts a ques­tion mark over the sus­tain­abil­ity of the cur­rent ac­count deficit.

Third, SA’s overde­pen­dence on for­eign port­fo­lio in­vest­ments has again been demon­strated. Though the end of the bull mar­ket that be­gan in 2003 is ap­par­ently not yet in sight, that day will even­tu­ally come and port­fo­lio man­agers will ad­just their strate­gies ac­cord­ingly.

All that’s needed to up­set the ap­ple cart is for the in­flow of port­fo­lio cap­i­tal to dry up, even if there’s no with­drawal of pre­vi­ous in­vest­ments.

The fact that the deficits of the re­cent past have been fi­nanced there­fore doesn’t lead au­to­mat­i­cally to the con­clu­sion that fu­ture deficits will be fi­nanced to the same ex­tent. The Bank in fact ad­mits that SA ben­e­fited from ex­ces­sive liq­uid­ity and low re­turns in de­vel­oped coun­tries.

That says noth­ing about the terms at which this fi­nanc­ing is avail­able: the fact is that the nom­i­nal ef­fec­tive ex­change rate of the rand is about 20% weaker than it was a year ago. In other words, for­eign­ers are only pre­pared to buy SA as­sets at lower prices than pre­vi­ously. SA’s cur­rent ac­count deficit places us in a small group of emerg­ing-mar­ket coun­tries that don’t sus­tain a sur­plus and that are con­se­quently re­garded as more risky. Any weak­en­ing in in­vestors’ rat­ing of risky as­sets will there­fore have a neg­a­tive ef­fect on the rand.

As for the prospects for 2007, the con­sen­sus view prior to the pub­li­ca­tion of the Quar­terly Bul­letin was that SA’s cur­rent ac­count deficit would be about 5,5% of GDP this year. That view can most prob­a­bly be ad­justed up­ward in view of the new in­for­ma­tion. As long as the growth in do­mes­tic spend­ing ex­ceeds that in do­mes­tic pro­duc­tion, for what­ever rea­son, SA will find it dif­fi­cult to re­duce the deficit on the cur­rent ac­count to a more sus­tain­able level. The im­me­di­ate prospect – in other words, for the first quar­ter of 2007 – is in any case not very rosy.

The bal­ance of trade for the first two months of 2007 again pro­vided an un­pleas­ant sur­prise, with a R13,6bn short­fall. Cus­toms Union pay­ments are also ex­pected to be ab­nor­mally high in the cur­rent quar­ter. Ac­cord­ing to Na­tional Trea­sury, those pay­ments were R19,8bn for the 10 months to end-Jan­uary 2007 com­pared with a bud­geted to­tal of R25,2bn.

That cre­ates the im­pres­sion that the pay­ment in the first quar­ter of 2007 could be as much as R10,3bn, com­pared with R4,9bn in the fourth quar­ter of 2006, which could to a large ex­tent neu­tralise any fall in oil im­ports (if this should hap­pen).

There­fore, the Bank faces a se­ri­ous dilemma. Must it wait and see whether the de­pre­ci­a­tion in the rand’s value will even­tu­ally lead to an im­prove­ment in the cur­rent ac­count deficit? How pre­ven­ta­tively should the Bank act to ad­dress the risk to the econ­omy aris­ing from the high deficit? Should the Bank be pre­pared to force the growth rate down to 3,5% or 4% in or­der to limit im­ports and im­prove the cur­rent ac­count bal­ance?

But per­haps the real point is sim­ply that SA’s na­tional sav­ings rate is too low, af­ter fall­ing fur­ther in 2006 to 13,9% of GDP. It’s cause for con­cern that sav­ings are at the low­est level since 1949, par­tic­u­larly at a time when the in­vest­ment rate is show­ing a wel­come ac­cel­er­a­tion.

An im­prove­ment in the sav­ings rate should long since have been a na­tional pri­or­ity. With­out that, it will be im­pos­si­ble to sus­tain a 6% growth rate, as en­vis­aged by As­gisa.

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