The deficit dominates
Revenue’s mistake doesn’t change the big picture
IN TRYING TO FORECAST the rand, one of the issues that dominate is the current account deficit. But now aspersions have been cast on the validity of South Africa’s current account statistics, given media reports of an R18bn mistake last year in the SA Revenue Service’s figures on exports and imports.
The central concern with Revenue’s figures is the treatment of temporary imports of gold for refinery purposes and the subsequent re-export of that gold. Before July 2008 the trade statistics included all direct imports but excluded all temporary imports. There was a similar basis for reporting exports in trade statistics. Revenue says there was a significant increase in the quantity of gold brought into SA for refining purposes to be taken out of the country again. That meant the “temporarily imported” gold had to be treated differently: it was decided to include it in the import statistics. However, the temporary nature of those imports wasn’t reflected in the export numbers.
Looking beyond the “shock, horror” headlines about the anomaly, the question is whether Revenue’s mistake means SA’s current account deficit – R186bn on an annualised basis in the third quarter of last year – was overstated by the SA Reserve Bank. According to a Bank official, the answer is an unequivocal “no”. The reason is that the Bank always adjusts Revenue’s figures it receives and that its numbers already reflect the adjustments for the temporary gold imports. There’s always a difference between Revenue’s and the Bank’s figures due to a range of reasons. So in the bigger scheme of things the mistake makes no difference.
However, on a monthly basis (when the trade figures are released by Revenue) the mistake can make a difference to immediate perceptions in the markets. (The current account figures are only released by the Reserve Bank once every quarter.) At the time of writing, Revenue was scheduled to make an announcement detailing the differences in the figures on 4 February.
The mistake in Revenue’s figures made a difference to the recently released December trade figures. Stanlib economist Kevin Lings says included in the figure for imports was an increase of a substantial R2,2bn in precious metals imports, which mainly represents gold destined for re-export. Lings doesn’t say so, but the implication is that the large monthly trade deficit of R9bn was overstated by more than R2bn.
SA’s large current account deficit is the main reason why Rand Merchant Bank currency strategist John Cairns is more bearish about the rand this year than some other economists. Although he expects the deficit to shrink to 6,5% of gross domestic product this year, that’s still “unusually large” – requiring substantial capital inflows from the rest of the world. He expects the rand to be volatile, trading in a range between US$1/R9 and US$1/R12. Cairns’s central forecast is for the rand to end the year at US$1/R10,50. He acknowledges that deep uncertainty about the future of the US dollar clouds the outlook.
But one thing Cairns is certain about is that the rand won’t strengthen again as it did after the 2001 currency shock. Other economists, such as ETM’s Russell Lambert, disagree. Cairns believes the post-2001 move was an anomaly.
Cairns says history shows that most sharp downward rand adjustments weren’t followed by sustained recovery: as examples, there are the experiences of 1996, 1998 and 2006. In addition, Cairns says international and local economic conditions are completely different from those prevailing in 2002 onwards. In 2002/2003 commodity prices boomed (the composite index rose 50%), the US dollar started a prolonged period of weakening (US$0,88/1 euro to US$1,20/euro by year-end 2003 and eventually to US$1,60/1 euro), risk-taking increased sharply – with a corresponding flood of money going to emerging markets and carry trades – and SA and the global economy embarked on a sustained strong recovery.
Says Cairns: “The rand is currently not nearly as undervalued as it was at the end of 2002. Most importantly, after the 2001 rand weakness SA was actually running a small current account surplus – quite a contrast to the current massive deficit.”
In addition, the Reserve Bank’s response to the 2001 rand weakness was to increase interest rates in 2002 and only to start cutting rates in 2003. By contrast, the Bank didn’t hike rates after the rand weakened sharply at year-end 2008 and is currently cutting rates (although SA still maintains high interest rates compared with the rest of the world).