Nene has to walk a tight passage now
Current account, fiscal deficit are problems
FINANCE Minister Nhlanhla Nene might have to revisit the assumptions he made in his first budget in February after the rand weakened to breach the R13 mark against the dollar for the first time in almost 14 years yesterday, economists said.
This is amid concerns about the tottering economy, afflicted by inflation and slowing growth in China.
An electricity shortage and persistent fiscal and currentaccount deficits are further fuelling the decline.
The problem facing Nene is how the country is going to finance the elevated current account deficit, as a result of imports exceeding exports, with less money at its disposal and the spectre of a sovereign credit rating downgrade.
Account deficit
The rand is being hurt by lower prices for resources that account for more than half of exports, slowing growth in China, which is the top destination for South Africa’s minerals, and the prospect of a US Federal Reserve interest rate increase.
The current account deficit narrowed to 4.8 percent of gross domestic product (GDP) in the first quarter from 5.8 percent in the fourth quarter of last year. The weaker rand raises import costs.
The rand fell 0.9 percent to touch R13.0030 against the dollar during the course of yesterday, its lowest level since December 2001.
Isaac Matshego, an analyst at Nedbank, said: “Portfolio outflows mean that financing the current account deficit is reduced, unless we see a proportionate increase in fixed investments and other investment outflows. This would raise the rate of the rand depreciation in the short term.”
He said the rand was likely to stay under downward pressure, in line with other emerging market and commodity currencies, as global investors liquidated some of their exposure to these markets.
“What we are witnessing is a global risk event, due to uncertainties about the extent of the Chinese slowdown, the impact of Chinese currency devaluation and the timing of the the US Fed’s interest rate normalisation.”
He said the weaker rand would exert further pressure on inflation, which could prompt the Reserve Bank to tighten more aggressively than currently expected.
Lefika Securities economist Colen Garrow said financing a burgeoning deficit on the current account was a problem when South Africa was also running a fiscal deficit.
Benchmark
He said both deficits had strayed from the international benchmark of 3 percent of GDP and this suggested weakness on the rand, higher inflation, an inevitably higher interest rates. “However, my feeling is that South Africa is veering uncomfortably towards a recession already. This may temper the extent to which local interest rates rise.”
Standard & Poor’s rating of South Africa is one notch from junk status while Moody’s Investors Service and Fitch rate the country two notches away.
Matshego said intensifying global macroeconomic pressures against the backdrop of weak domestic growth and rising inflation suggested a downward grade of South Africa’s foreign currency rating was becoming more likely.
Garrow said: “It won’t take much to downgrade the South African sovereign credit. If one has a view, like I do, that GDP growth this year may be lower than the 2.1 percent forecast by the National Treasury, then all key financial stability ratios are likely to be compromised.”
He said the pending strikes in gold mines would compromise GDP and did not help the case for maintaining South Africa’s credit rating where it was now. “This is why it is allimportant that Nene does the near impossible task of appeas- ing the credit rating agencies when he delivers the mediumterm budget policy statement in October.”
The rand has lost 11 percent to the dollar this year, weighed down by a decline in commodity prices this year that threatens to slow growth amid a selloff in emerging markets.
This is amid concerns about the tottering economy, afflicted by inflation and wage settlements.