Johannesburg - The weaker rand will restrict the narrowing of South Africa’s current-account deficit because of the high level of imports needed to feed infrastructure investment, Reserve Bank Deputy Governor Daniel Mminele said.
“While a flexible exchange rate will serve as a shock-absorber and facilitate the necessary adjustments, the recent depreciation in the exchange rate of the rand will probably lead to a somewhat slower rate of compression in the current account deficit than normally would be the case,” Mminele said today at a conference in New York, according to a copy of the speech published on the central bank’s website.
The financing of the current-account deficit “has to date not presented a significant challenge, with South Africa continuing to attract capital flows,” he said.
The rand has lost 15 percent against the dollar this year as the US Federal Reserve contemplates the reduction of its $85 billion-a-month monetary stimulus program that’s helped to support global growth.
The shortfall on the current account of Africa’s largest economy widened to 6.5 percent of gross domestic product in the second quarter, from 5.8 percent in the first three months of the year.
The Reserve Bank is “concerned about the impact of asset purchase tapering and local developments as they impact the exchange rate of the rand and ultimately prices,” Mminele said.
South Africa depends on capital inflows to help finance its current-account deficit and the World Bank and the International Monetary Fund said this week that South Africa is vulnerable to the risk of capital outflows. - Bloomberg News