Johannesburg - The gap on South Africa’s current account could narrow by more than two percentage points in the next six months as imports decline and exports recover because of stronger global growth, Bank of America Merrill Lynch said.
The deficit on the current account, the broadest measure of trade in goods and services, will probably shrink to 4.6 percent of gross domestic product in the second quarter, from 6.8 percent in the third quarter of last year, Matthew Sharratt, a Cape Town-based economist at BofAML, told reporters in Johannesburg today.
The shortfall could average 4.7 percent for the year, BofAML said.
That compares with the National Treasury’s forecast of 6.4 percent.
The narrowing of the deficit is “simply because there is so much downward pressure on consumption,” Sharratt said.
“The weak rand, combined with a definite improvement in global demand, would help the export side.”
South Africa’s current-account deficit puts pressure on the rand, which lost 19 percent of its value against the dollar in 2013.
It’s weakened another 3.8 percent this year, the worst performer among 16 major currencies tracked by Bloomberg.
While an improvement in balance of payments will help support the rand, it’s unlikely that the currency will appreciate beyond the levels of 10 or 10.50 to the dollar because of a stronger US currency, Sharratt said.
BofAML forecast the rand will average 10.25 against the dollar in the second quarter of this year, and 10 in the final three months of 2014.
South Africa’s current-account deficit is partly financed by inflows of foreign capital to local bonds and equities.
The US Federal Reserve’s decision to start tapering its monthly monetary stimulus package means less easy money is available to flow into emerging markets like South Africa.
A reversal of portfolio flows “is a risk to the current account, but the absolute size of what needs to be funded is going to decline quite sharply,” Sharratt said.
“The Fed is tapering simply because the US growth outlook is improving and if the US outlook is improving there will be positive knock-on effects.” - Bloomberg News