‘Current account set to worsen’
But some economists disagree with Manuel
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%.