A worse-than-expected current account deficit in the fourth quarter of last year and sweeping revisions to earlier figures sent the rand sharply lower yesterday.
The currency slid from R9.10 to the dollar at 10am to R9.21 on news that the gap between South Africa’s income from exports of goods and services and the import bill has been even wider than was previously thought. The rand recovered to be bid at R9.1317 a dollar at 5pm.
The Reserve Bank’s Quarterly Bulletin put the fourth-quarter deficit at 6.5 percent of gross domestic product (GDP), higher than market expectations of 6.3 percent. And the 6.3 percent deficit for the full year was the highest since the 7.2 percent recorded in 2008.
More concerning, the figure was higher than the 6.1 percent estimate by Finance Minister Pravin Gordhan, in his Budget speech only two weeks ago.
In addition, historic figures were revised upward. In the first, second and third quarters, the deficit was equal to 5 percent, 6.7 percent and 6.8 percent of GDP, respectively, compared with the previous estimates of 4.8 percent, 6.4 percent and 6.4 percent.
Peter Worthington, an analyst at Barclays Research, said the deficit in the first three months of this year could be around 8 percent of GDP – a level that could weaken the rand further.
The balance on the current account is the measure of a country’s ability to pay its way, without resorting to the savings of foreigners. And a deficit of this order shows South Africa depends heavily on offshore capital inflows.
Moreover, by putting the rand under pressure, it is eroding the purchasing power of the money in people’s pockets.
Against this backdrop, the health of the financial account in the fourth quarter is cause for concern. Inflows on the financial account fell from R58.6 billion in the third quarter to R48.8bn. These figures are not seasonally adjusted or annualised.
The deterioration in both the current and financial accounts owed much to the series of wildcat strikes, mainly in the mining and agricultural sectors, toward the end of last year. The events disrupted export production and scared off potential investors.
Queried on the current account revisions, Reserve Bank officials noted that the figures were often revised, as the SA Revenue Service released audited figures for trade. And they said adjustments were also made to the services account. But they failed to specify what had caused the revisions in last year’s figures.
According to the bulletin, exports gained momentum in the fourth quarter, due to an increase in demand from several emerging market economies. But the benefit was almost fully offset by a rise in the value of imports. And, while the weaker rand boosted the value of export revenues, it also inflated the import bill. The net impact of the various forces at work was to narrow the trade gap marginally from R87.3bn in the third quarter to R86.1bn in the fourth.
The deficit in services – the second leg of the current account – contracted slightly from R127.7bn to R126.5bn.
The figures are seasonally adjusted and multiplied by four to show an annualised trend.
A breakdown of the financial account shows a net R1.4bn outflow of foreign direct investment (FDI) in the fourth quarter. The bulletin said it was “mainly related to the sale of a non-resident mining company’s equity holding in its South African subsidiary”. Gold Fields unbundled most of its South African assets into Sibanye Gold late last year.
While industrial unrest and policy uncertainty contributed to the poor FDI performance, it was also part of a global trend.
The bulletin noted that global FDI declined by 18 percent last year due to “macroeconomic fragility and policy uncertainty”.
Also on the financial account, a net R12.5bn was placed in local bonds and shares, down from R27.5bn in the third quarter. The decline came despite South Africa’s inclusion in Citi’s world government bond index.
The bulletin noted: “The deterioration in investor sentiment towards South Africa was in contrast to the gradual improvement in the outlook for developed and emerging market economies over the medium term.”
The situation was saved in the fourth quarter by a net R38.4bn in “other investment” – largely loan capital to the domestic banking sector.
South African mining, wholesale and health-care companies invested abroad to the tune of R16.8bn. And local institutions invested in financial securities worth R9.2bn.
Countering this, domestic bank deposits with, and loans to, offshore banks declined by R15.1bn.