The deficit dom­i­nates

Rev­enue’s mis­take doesn’t change the big pic­ture

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN

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).

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