Business Day

Rand thwarted de­spite progress

Slashed deficit fails to prop up cur­rency

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IT IS rather sad, re­ally. On Tues­day, we learnt that the deficit on the cur­rent ac­count of SA’s bal­ance of pay­ments had come right down, a wel­come move that should strengthen the rand be­cause it means SA is less de­pen­dent on volatile in­flows of for­eign cap­i­tal.

In­stead, the rand ended the day 2% down, mak­ing it one of the worst losers along with the Brazil­ian real and Mex­i­can peso. And it is only small com­fort that the Aus­tralian and Cana­dian dol­lars were also among the big losers, as global mar­kets con­tin­ued to swing away from risky as­sets in gen­eral and re­source-ex­port­ing emerg­ing mar­kets in par­tic­u­lar.

The “risk-off” global sen­ti­ment is be­ing driven by un­cer­tainty — yet again — about when the US Fed­eral Re­serve might raise in­ter­est rates and con­cerns about sig­nals from the Eu­ro­pean Cen­tral Bank that it may not be as loose as it has been with its mone­tary pol­icy.

Com­mod­ity prices have been sub­sid­ing too. The re­sult has been a resur­gent dol­lar and a slide in emerg­ing-mar­ket and com­mod­ity cur­ren­cies, in­clud­ing the rand. Our coun­try’s own dis­plays of po­lit­i­cal dys­func­tion­al­ity haven’t helped ei­ther.

All of which is a pity given that the bal­ance of pay­ments, at least, is look­ing bet­ter than it has for some time and that the weaker rand seems at last to be yield­ing some ben­e­fits.

Tues­day’s Re­serve Bank Quar­terly Bul­letin showed the cur­rent ac­count deficit had fallen to 3.1% of GDP in the sec­ond quar­ter, from 5.3% in the first quar­ter and 4.3% for 2015.

The eco­nom­ics text­book says a weaker cur­rency should make ex­ports more com­pet­i­tive and im­ports more costly, help­ing to nar­row the trade deficit — which is the ad­van­tage of hav­ing a float­ing ex­change rate that can bring about this kind of re­bal­anc­ing.

Although there was lit­tle sign of this ear­lier, the lat­est num­bers sug­gest the text­book works. The vol­ume of mer­chan­dise ex­ports jumped by 5.6% in the sec­ond quar­ter, and the value surged by 9.1% as prices im­proved; min­ing ex­port pro­ceeds rose too as com­mod­ity prices — specif­i­cally plat­inum — im­proved.

A very weak econ­omy put the lid on im­ports, but with SA im­port­ing more crude oil and maize, the value of im­ports still rose — but at 1.2%, this was a lot less than the value of ex­ports, so the trade deficit widened sig­nif­i­cantly.

The trade bal­ance is al­ways the big swing fac­tor on the cur­rent ac­count, but the in­come and ser­vices side is cru­cial too, and the trend was rea­son­ably favourable in the sec­ond quar­ter.

SA is one of the more vul­ner­a­ble of the emerg­ing­mar­ket economies be­cause of its twin cur­rent ac­count and fis­cal deficits, which sig­nify in ef­fect that we are liv­ing be­yond our means. SA de­pends on con­stant in­flows of for­eign cap­i­tal to fi­nance the deficit, and that is not a good po­si­tion to be in given global volatil­ity and un­cer­tainty — one rea­son why the rand has been so weak.

The lat­est fig­ures show SA is that much closer to liv­ing

SA is one of the more vul­ner­a­ble emerg­ing­mar­ket economies be­cause of its twin cur­rent ac­count and fis­cal deficits

within its means, and it is par­tic­u­larly wel­come that growth in the sec­ond quar­ter was much more ex­por­to­ri­en­tated. The trou­ble is that the in­crease in ex­ports was driven mainly by plat­inum and mo­tor ve­hi­cles, with some cit­rus in the mix, and while the weaker rand clearly helped, there is lit­tle sign that SA is di­ver­si­fy­ing its ex­port base or be­com­ing more com­pet­i­tive or ex­port-ori­en­tated sus­tain­ably.

That sug­gests the sec­ond quar­ter’s bounce in ex­ports and eco­nomic growth may not be sus­tained in the sec­ond half of this year, and that there is much to be done to re­form the fun­da­men­tals of the econ­omy if SA is to lift its growth rate and cre­ate jobs and in­comes.

The prom­ises of struc­tural re­form keep com­ing; in the cur­rent po­lit­i­cal en­vi­ron­ment, these look like lit­tle more than prom­ises. We can but hope. And at least the rand strength­ened a bit on Wed­nes­day, again mainly on global, not lo­cal fac­tors.

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