Rand thwarted despite progress
Slashed deficit fails to prop up currency
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.