NORESERVATIONS

Strong rand has been a missed op­por­tu­nity

Finweek English Edition - - COLUMN - GRETA STEYN

The pub­lic sec­tor hasn’t

got its act to­gether to im­port the cap­i­tal goods

needed for in­fra­struc­ture spend­ing, and

the pri­vate sec­tor doesn’t have enough con­fi­dence in the econ­omy

THOSE CLAM­OUR­ING FOR a weaker rand would do well to take a look at South Africa’s re­cent trade per­for­mance, par­tic­u­larly for Novem­ber. Ex­ports aren’t do­ing too badly, de­spite the rand’s strength, al­though of course the sit­u­a­tion could be bet­ter. The trade ac­count recorded a mas­sive sur­plus of R8,4bn in Novem­ber, dwarf­ing Oc­to­ber’s R3,2bn deficit as ex­ports soared. Month-on-month, ex­ports were up 20,8%.

How­ever, the sit­u­a­tion was over­stated by iron ore trans­ac­tions of R3,2bn that oc­curred in Oc­to­ber but were only re­ported in Novem­ber. That would have de­creased Oc­to­ber’s trade deficit dra­mat­i­cally to near zero and re­duced Novem­ber’s sur­plus to R5,2bn.

The monthly trade fig­ures are no­to­ri­ously volatile and sub­ject to anom­alies, as the iron ore is­sue shows. But taken over three months the trade bal­ance was com­fort­ably in sur­plus. (There was a sur­plus of R3,6bn in Septem­ber.) That tells us things about SA’s econ­omy. First, that ex­ports – par­tic­u­larly of com­modi­ties – aren’t do­ing badly at all, which sug­gests the global eco­nomic up­turn is be­com­ing en­trenched and SA is ben­e­fit­ing from the re­bound in man­u­fac­tur­ing in many places world­wide. Sec­ond, im­ports are fairly weak. For the year to Novem­ber 2010, im­ports were up 8,4% com­pared with the same pe­riod a year ago. That’s a low num­ber, es­pe­cially given the rand’s strength.

We’ve been con­di­tioned into think­ing low im­ports are a good thing, al­most as good as high ex­ports. But that’s cer­tainly not the case if our low im­ports re­flect a lack of cap­i­tal goods be­ing im­ported. That’s the case in SA. We have failed to take ad­van­tage of the strong rand to build our phys­i­cal cap­i­tal stock. It shows the pub­lic sec­tor hasn’t got its act to­gether to im­port the cap­i­tal goods needed for in­fra­struc­ture spend­ing and that the pri­vate sec­tor doesn’t have enough con­fi­dence in the econ­omy to in­vest in phys­i­cal cap­i­tal.

So while the trade sur­plus is good news from the point of view of ex­ports, it’s bad news from the point of view of im­ports. SA should be im­port­ing a whole lot more. South Africans have failed to take ad­van­tage of the strong rand, show­ing a lack­lus­tre SA econ­omy where bureau­cratic snarlups and lack of busi­ness con­fi­dence hold sway. It’s an op­por­tu­nity missed.

Just as we’ve been con­di­tioned to be­lieve im­ports are evil, we’ve also been con­di­tioned to be­lieve a cur­rent ac­count deficit is a bad thing. The cur­rent ac­count is the trade deficit less net pay­ments for “in­vis­i­bles” – such as in­ter­est, tourism and div­i­dends. True, an ex­ces­sive cur­rent ac­count deficit – say, 6% of gross do­mes­tic prod­uct – is def­i­nitely a bad thing. It makes us overly re­liant on for­eign cap­i­tal to fi­nance that deficit. But at the level it was last at – 3% of GDP in third quar­ter 2010 – there’s no cause for con­cern.

It’s im­por­tant to note a trade sur­plus doesn’t trans­late into a cur­rent ac­count sur­plus, due to the pay­ments for “in­vis­i­bles”. The cur­rent ac­count deficit widened in the third quar­ter to 3% of GDP from 2,5% of GDP in the sec­ond quar­ter, de­spite an im­proved trade sur­plus.

Stan­lib econ­o­mist Kevin Lings says the trade sur­plus im­proved to 1,23% of GDP in the third quar­ter from 0,5% of GDP in the pre­vi­ous quar­ter. This im­prove­ment was due to the fact that ex­ports hand­somely out­per­formed im­ports. The “in­vis­i­bles” or ser­vices deficit on the cur­rent ac­count in­creased from 3% of GDP to 4,2% of GDP be­tween the two quar­ters, which was mainly due to an in­crease in travel pay­ments, a de­crease in travel re­ceipts and an in­crease in div­i­dend out­flows. The fall-off in for­eign tourism af­ter the Soc­cer World Cup played a role, as did the fact that many more South Africans took trips out­side the coun­try, pos­si­bly tak­ing ad­van­tage of the strong rand.

The cur­rent ac­count deficit can be ex­pected to widen fur­ther, re­flect­ing the fact SA has to pay more in in­ter­est and div­i­dends due to over­seas in­vest­ment in our mar­kets. Im­ports are also ex­pected to pick up, which would be a good thing.

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