Strong rand has been a missed opportunity
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.