‘Cur­rent ac­count set to worsen’

But some economists dis­agree with Manuel

Finweek English Edition - - Portfolio Punts -

FI­NANCE MIN­IS­TER TREVOR MANUEL’S mini-Bud­get con­tained some wor­ry­ing news for economists as it fore­cast a wors­en­ing of South Africa’s cur­rent ac­count deficit. The cur­rent ac­count is the bal­ance of all of SA’s im­ports and ex­ports, in­clud­ing in­vis­i­ble trade such as in­ter­est, div­i­dends, freight and in­sur­ance.

Some an­a­lysts as­cribed part of the col­lapse in the rand’s value af­ter the mini-Bud­get to cur­rent ac­count fore­casts. Though it’s more likely that the strong US dol­lar bat­tered the rand, the neg­a­tive fore­casts didn’t help SA’s be­lea­guered cur­rency.

Oth­er­wise, the mini-Bud­get paints a pic­ture of an econ­omy that won’t sink into re­ces­sion de­spite global fi­nan­cial calamity and in which inflation will come down quickly.

Economists have de­scribed the Medium Term Bud­get Pol­icy State­ment (MTBPS) fore­casts on the cur­rent ac­count as wor­ry­ing. Manuel sees the cur­rent ac­count deficit widen­ing to 7,6% of GDP in 2008, 7,8% in 2009, 8,9% GDP in 2010 and 8,8% of GDP in 2011. Com­pared to other coun­tries, that’s very high, with 6% usu­ally re­garded as enough to set off alarm bells.

How­ever, Stan­dard Char­tered econ­o­mist Razia Khan cau­tions against read­ing too much into the fig­ures. “How much are th­ese dire fore­casts likely to be borne out by re­al­ity? In 2002 – the last time SA ex­pe­ri­enced ex­ag­ger­ated cur­rency weak­ness – the coun­try even reg­is­tered a small sur­plus on its cur­rent ac­count. What’s un­clear is whether those fore­casts were for­mu­lated prior to the most re­cent bout of rand volatil­ity,” Khan says.

She says it seems im­prob­a­ble that weak­ness in the rand on the scale seen re­cently won’t suc­ceed in draw­ing out at least some pos­i­tive re­sponse on the bal­ance of pay­ments. True, the slow­down in key trad­ing part­ners will make ex­port growth more dif­fi­cult. The last time SA ex­pe­ri­enced com­pa­ra­ble rand weak­ness it was in the con­text of a global re­cov­ery from the shal­low US re­ces­sion of 2001. In ad­di­tion, com­mod­ity price weak­ness and un­cer­tain elec­tric­ity out­put out­look would muddy the wa­ters for min­ing ex­ports. But SA stands to ben­e­fit from weaker oil prices.

Also very im­por­tant is the fact that the cru­cial ser­vices ac­count of the cur­rent ac­count is likely to ben­e­fit from lower div­i­dend pay­outs, re­flect­ing both for­eign in­vest­ment and dis­in­vest­ment from the JSE and lower div­i­dend pay­ments by cash-strapped com­pa­nies.

“Bot­tom line, we don’t ex­pect the cur­rent ac­count deficit to be as bad as the Trea­sury has fore­cast,” Khan says.

An­other neg­a­tive fac­tor to emerge from the mini-Bud­get is that Gov­ern­ment is likely to put some pres­sure on the bond mar­ket, be­cause it will shift from a sur­plus to a deficit next year. Absa Cap­i­tal says bor­row­ing will have to be borne by SA’s mar­kets. “That makes it an ex­tremely neg­a­tive MTBPS for the bond mar­ket, which sup­ports our bear­ish view on lo­cal rates,” Absa Cap­i­tal says.

But Khan says the prospect of repo rate cuts – she’s still fore­cast­ing cuts to start in April next year, de­spite the weak rand – will pro­vide some sup­port for the bond mar­ket, even as it grap­ples with the size of the in­creased pub­lic sec­tor bor­row­ing re­quire­ment.

An im­por­tant as­pect of the eco­nomic fore­casts made by Manuel is that inflation will fall into the tar­get band of 3% to 6% in third quar­ter 2009. That’s a whole lot more op­ti­mistic than the Re­serve Bank’s fore­cast, which sees inflation fall­ing within the tar­get by sec­ond quar­ter 2010. Manuel didn’t say any­thing about in­ter­est rates but his fore­cast sug­gests there’s scope for early in­ter­est rate cuts. Khan says it’s un­clear to what ex­tent Trea­sury’s inflation fore­cast takes re­cent rand volatil­ity into ac­count.

Manuel has re­mained rel­a­tively op­ti­mistic about SA’s eco­nomic growth in the face of the world­wide credit cri­sis, al­though he was forced to make a mas­sive re­vi­sion to growth fore­casts for next year. “While the end­point of the global credit cri­sis doesn’t lend it­self to ac­cu­rate pre­dic­tions, SA ap­pears set to avoid the worst con­se­quences of th­ese de­vel­op­ments,” Manuel said in his speech.

How­ever, growth fore­casts for next year are looking pedes­trian. Growth for 2009 has been re­vised sub­stan­tially down­wards, from 4,2% in the Fe­bru­ary Bud­get to just 3%. While that’s way down on the 5% growth seen be­tween 2004 and 2007, the key point is that it’s still far from a re­ces­sion and is the type of growth SA used to be lucky to achieve.

Manuel is more op­ti­mistic about eco­nomic growth for this year than pri­vate sec­tor economists, with his growth fore­cast at 3,7%. That com­pares with his Fe­bru­ary Bud­get fore­cast of 4%. The most op­ti­mistic pri­vate sec­tor fore­cast­ers are putting growth this year at 3,5%.

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