Cur­rent ac­count deficit hurts the Rand

Finweek English Edition - - IN BRIEF - BY LAMEEZ OMARJEE

The neg­a­tive im­pact of the cur­rent ac­count deficit on the rand is at its high­est point since at least the Rus­sian fi­nan­cial cri­sis in 1998. This is the view of Wal­ter de Wet, head of South Africa re­search at Stan­dard Bank.

If the coun­try had a cur­rent ac­count deficit of zero, rather than the short­fall of R189bn, the rand could have been trad­ing closer to R10 against the US dol­lar, he said at a press brief­ing in Rose­bank on 27 July. At the time of writ­ing, the ex­change rate was R12.55.

SA has been run­ning a cur­rent ac­count deficit – and a fairly wide deficit com­pared to its peers – for over a decade, said De Wet, who has stud­ied how changes in the cur­rent ac­count af­fect the ex­change rate. The ex­change rate has a di­rect im­pact on key in­put costs in the econ­omy, such as the petrol price, and there­fore in­fla­tion.

He said while the ex­change rate was much more sen­si­tive to the cur­rent ac­count deficit in 1999, the net im­pact on the cur­rency was smaller back then be­cause SA was run­ning a much smaller deficit. Be­tween 2008 and 2012, the rand was most in­sen­si­tive to the deficit, De Wet said.

But since the US Fed­eral Re­serve’s de­ci­sion to end its quan­ti­ta­tive eas­ing pro­gramme early in 2013, the rand has be­come more sen­si­tive to the cur­rent ac­count deficit, De Wet said.

A coun­try’s cur­rent ac­count deficit is fi­nanced by for­eign in­vest­ment, largely port­fo­lio f lows in SA’s case. How­ever, t his is chal­leng­ing when port­fo­lio f lows are volatile, be­cause this makes

(FORECAST) the rand volatile.

The rand has also been hurt by the de­cline in com­mod­ity prices, which had a neg­a­tive im­pact on the cur­rent ac­count. Met­als and min­eral com­mod­ity ex­ports – mainly plat­inum group met­als, gold, coal and iron ore – ac­count for around 53% of SA’s ex­ports of phys­i­cal goods, ac­cord­ing to Stan­dard Bank.

While the lower prices for crude oil and petroleum prod­ucts in turn ben­e­fit the cur­rent ac­count bal­ance, the pro­por­tion of these im­ports to to­tal phys­i­cal goods im­ports (at around 20%) is much less than the pro­por­tion of com­mod­ity ex­ports to to­tal phys­i­cal goods ex­ports.

“A sim­ple rule of thumb would be that for the terms of trade to re­main un­changed, the fall in oil prices would have to be two-and-a-half times the fall in the prices of the com­modi­ties we ex­port,” De Wet said.

With an in­ter­est rate hike ex­pected in the US in Septem­ber, SA will be less at­trac­tive to port­fo­lio f lows, which is ex­pected to put fur­ther pres­sure on the cur­rency. “Strate­gi­cally, we ex­pect the rand to re­main un­der pres­sure in the next 12 months. Tac­ti­cally we ex­pect ral­lies, but these are likely to fade,” he said.

The deficit has come down to 4.6% of GDP in the sec­ond quar­ter, from 4.8% in the first quar­ter, but it is likely to in­crease to 5.8% in the third quar­ter and 5.5% in the fourth due to sea­sonal flows, De Wet said. In­fla­tion was likely to av­er­age 4.7% this year and 5.7% in 2016, while the econ­omy was likely to grow by 2% this year and 1.7% next year, it said.

The South African Re­serve Bank (SARB), which hiked the prime lend­ing rate 25 ba­sis points to 9.5% on 23 July, is only ex­pected to in­crease rates again by the mid­dle of next year, ac­cord­ing to Stan­dard Bank Re­search.

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