Current account deficit hurts the Rand
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.