Rand slides as current account gap grows

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Johannesburg - The rand tumbled yesterday on news that the gap between income from exports of goods and services and the country’s import bill widened sharply in the third quarter.

The Reserve Bank reported that the shortfall – known as the current account deficit – was equal to 6.8 percent of gross domestic product (GDP), well above the 6 percent expected by the markets and the revised 5.9 percent in the second quarter.

The rand, which traded at R10.27 to the dollar early in the day, fell to R10.3532 before noon. At 5pm it was bid at R10.3183.

A deficit above 3 percent puts the currency at risk and threatens the economy’s capacity to grow.

Absa Capital economist Peter Worthington described the latest figure as “a material deterioration”.

The deficit on the current account, which includes the trade and services accounts, expanded despite the recent inclusion of data from neighbouring countries, which significantly improved the picture of South Africa’s trade with the rest of the world.

Before the restatement, the second-quarter deficit had been estimated at a much higher 6.5 percent of GDP.

Stanlib chief economist Kevin Lings calculated that the latest current account deficit could have been as high as 7.8 percent of GDP had the revision not occurred. “This would have been a shock and extremely concerning.”

The central bank noted in its quarterly bulletin that the third-quarter weakness was partly due to higher net dividend and interest payments to the rest of the world, which are reflected on the services account.

But other factors played a part. Worthington pointed to the third-quarter drop in motor vehicle exports (down 11 percent year on year in the period) due to strike action.

The bulletin recorded that growth in domestic spending outstripped the increase in production. “And given the relatively high import content of capital goods and durable and semi-durable consumer goods, the volume of merchandise imported rose more strongly in the third quarter than the volume of merchandise exports.”

The higher volume of merchandise imports “coincided with a firm increase in the rand price of such imports, lifting South Africa’s import bill significantly over the period”.

The hole in the current account was plugged by inflows on the financial account: a combination of direct, portfolio and other investment. The bank’s bulletin said: “Inward foreign direct investment was concentrated in the financial and pharmaceutical sectors of the economy, while portfolio investment consisted mainly of the acquisition of debt securities by non-residents.”

The bulletin explained that foreigners’ net purchases of domestic rand-denominated bonds were boosted by the issue of international bonds by the National Treasury and a public corporation.

Despite these benefits the rand weakened in the third quarter as the weak current account, “prolonged strike action” and the relative weakness of export prices created pessimism about the local economy.

Data on fourth-quarter flows on the financial account are discouraging. Figures from Citi show foreigners sold a net R33.4 billion in local bonds and shares last month and R3.1bn worth in October.

Flows on the current account reflect slow growth in the global economy and the impact of labour unrest on domestic production. The bulletin recorded that the number of workdays lost due to industrial action “rose notably from 1.6 million in the first nine months of 2012 to 4.7 million in the same period of 2013”.

The bulletin noted that, despite the rising trends in labour unrest and workdays lost to strikes, union membership fell by roughly 334 000, or 9.9 percent, from 3.39 million in 2011 to 3.06 million last year. - Business Report

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