Rand clobbered on poor trade figures
SOUTH Africa’s deficit on the current account widened to its highest level since 2008 during the third quarter of this year, knocking the rand to a near five-year low. More importantly, it fanned concerns that the currency could depreciate further, which would ignite inflation and force the Reserve Bank to hike interest rates.
The shortfall on the current account ballooned to 6.8% of GDP from 5.9% in the second quarter. This flew in the face of expectations that the gap would actually narrow, and came despite a favourable revision to the country’s trade data after incorporating flows between South Africa and Botswana, Namibia, Lesotho and Swaziland.
The figures in the Reserve Bank’s December quarterly bulletin, released on Tuesday, were the trigger for the rand’s slide of about 2.3% to R10.53 against the dollar two days later. The blowout in the currency was exactly what the Bank had cited as the biggest potential risk to inflation at its monetary policy meeting last month.
Analysts said the rand could extend its losses, given the substantial outflows of foreign capital invested in local shares and bonds during the past two months. The trend is alarming as the current account deficit is financed mainly by these volatile short-term portfolio and banking inflows.
“I don’t think there will be much of a recovery in the rand in the short term — there is a risk it will move to R11 to the dollar,” said Sean McCalgan, the head of research at ETM Analytics. The currency “will struggle” to get back below R9.50 to the dollar when it does begin to claw back some of its losses next year, he added.
The rand is seen as one of the emerging-market currencies most vulnerable to “tapering”, which refers to the potential scaling back of the US Federal Reserve’s monthly bond purchasing programme. This is expected to lead to the rapid withdrawal of cash which was pumped into highyielding “risky” assets.
There has already been substantial outflows of foreign capital
Only Turkey and Ukraine are running larger current account deficits
in the past two months as global investors sold local shares and bonds, more than reversing the inflows seen during the third quarter of this year. In the year to date, net capital inflows amounted to just R21.5-billion compared with R91-billion for 2012.
“Although the rand is oversold it remains extremely vulnerable to further depreciation, especially when tapering is finally announced,” Stanlib economist Kevin Lings said.
The rand is already the worstperforming major currency this year, according to Bloomberg. Among the main emerging economies, only Turkey and Ukraine are running larger current account deficits.
The size of the shortfall, which amounted to a record R233-billion during the third quarter, is also seen by rating agencies as one of the main threats to South Africa’s investment-grade credit rating. Market speculation about an imminent downgrade was discounted by analysts.
The current account deficit widened as the weaker rand pushed up the cost of imports of manufactured goods and mineral products. At the same time, labour unrest and its effect on industrial production curbed growth in exports.
South Africa’s trade deficit jumped to R108-billion during the third quarter of the year from R77billion the quarter before. The worsening trend was exacerbated by a widening deficit in the services, income and transfer component of the current account, which rose to R125-billion from R120-billion.
This partly reflected dividend payouts to foreign investors holding local bonds and shares, which will subside in the fourth quarter of this year in response to the capital outflows.
Analysts do not see much improvement in the current account in the months ahead. The trade deficit widened to R12.3-billion in October from R11.91-billion in September, according to SARS.