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Widening deficit a threat to currency

The deficit on South Africa’s current account widened dramatically in the second quarter as the value of exports fell 1.3 percent while imports rose 3 percent, according to the Reserve Bank Quarterly Bulletin, released yesterday.

The deficit – the shortfall between revenue from exports and the import bill – rose to 6.4 percent of gross domestic product (GDP) from 4.9 percent in quarter one. Anything more than 3 percent of GDP is a threat to currency stability.

Graphic: Renjith Krishnan.

Meganomics economist Colen Garrow said the figure suggested interest rates would not be cut further “for the time being”. When the Reserve Bank monetary policy committee meets this month it will consider the threat to the rand and the likely impact on inflation.

The rand weakened from R8.16 to the dollar just after 9am to R8.23, when the news was released at 10am. By 5pm, the rand traded at R8.13.

The currency depreciated from an average R8 to the dollar in January to R8.39 by the end of the second quarter. But this competitive advantage failed to stimulate export growth as predicted by those who favour a weak currency.

Recession in Europe and slower growth in China, key markets for local goods, were largely responsible for the disappointing export data. South Africa was not the only casualty. The bulletin noted growth in world trade volumes slowed to an annualised 1.3 percent in the second quarter from 3.1 percent in the previous quarter.

First news on GDP came last month when Statistics SA published output figures which showed the economy grew 3.2 percent in the second quarter, from 2.7 percent in the first – quarterly figures, adjusted for inflation and seasonal factors and multiplied by four to show an annualised trend.

Economists believe the second quarter spurt is misleading because it comes off a low base. The first quarter was marked by strikes and stoppages in the mining sector, while April to June was a more normal period, allowing for increased production. Given the problems in the mining sector in the current quarter, the improvement has clearly reversed.

The Quarterly Bulletin, which provides GDP data based on expenditure, provides a different perspective on underlying trends in the economy.

It showed a poor export performance was not the only bad news. Domestic consumption weakened. Growth in final consumption by households fell to 2.9 percent in the second quarter – the lowest since the second quarter of 2010 – from 3.1 percent in the first and 5 percent last year.

The bulletin said persistent increases in the cost of electricity and transport eroded household purchasing power.

Fixed investment held up, as growth in capital formation rose from 5.3 percent to 5.7 percent. Government capital outlays grew fastest – at 15 percent – “driven by all three layers of government”. And capital spending by public corporations rose 9.1 percent. But the private sector increase was a disappointing 2.4 percent.

Another alarming trend was accelerated consumption by government – from growth of 2.2 percent in the first quarter to 4.1 percent in the second.

The bulletin attributed this to “continued growth in real spending on compensation of employees”. This may be a sign that Finance Minister Pravin Gordhan, who hopes to moderate government’s wage bill, will have an uphill battle.

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