Finance Minister Nhlanhla Nene has his work cut out on October 22 when he tries to convince the markets and sovereign rating agencies that he has a credible plan for the ballooning current account deficit.
His task will be made more difficult by the eclipsing market expectations, which sent the rand sliding yesterday on news that the deficit on the current account widened to 6.2 percent of gross domestic product (GDP) from 4.5 percent in the first quarter due to prolonged strikes in metals and engineering.
This is Nene’s first medium-term budget policy statement after his May appointment.
The rand fell 1 percent to R10.9132 against the dollar at mid-morning yesterday on the news that the shortfall of the deficit in the second quarter widened more than expected. This was the lowest level since March 24 and shows investors are worried about the economy.
The market consensus was a 5.5 percent shortfal. A current account deficit measures trade in which the value of goods and services it imports exceeds the value of exports.
The deficit raises the spectre of another sovereign downgrade in December and interest rate hike by 0.25 percentage points this month. A rating downgrade lifts costs to borrow. Matthew Pimie at Standard & Poor’s said the agency had not come up with any particular view on the numbers.
The Reserve Bank said structural impediments coupled with strikes, a moderation in global demand and declining commodity prices dented exports in the second quarter.
The value of imports also contracted over the period but to a lesser extent, so the trade deficit of the balance of payments widened from R75 billion in the first quarter to R101bn in the second quarter. As a ratio of GDP, the trade deficit deteriorated from 2.1 percent to 2.8 percent in the same period.
The Reserve Bank said the weaker export performance in the second quarter could be ascribed to a decrease in both the volume and prices of exports.
“Having increased for five consecutive quarters, the volume of merchandise exports [excluding gold] contracted 4.4 percent in the second quarter of 2014, strongly influenced by lower [platinum output following labour strikes from] January until late June.”
In addition to falls in ferromanganese and coal exports, export volumes were wounded by lower demand from Asia.
The value of exports to Europe plunged as the strike in the platinum sector spilled over to several domestic subsectors.
Vehicle exports shrank due to the high number of public holidays over Easter and the upgrade of a car-making plant.
The Reserve bank says after bouncing back in the first quarter, import volumes contracted by 1.2 percent as both crude oil and non-oil imports fell, thanks to rand strength.
Citigroup economist Gina Schoeman said the widening took the deficit this year to R222bn, the largest on record. “We note the second quarter current account deficit was already expected to widen, given that the first-quarter narrowing was due to significant dividend inflow that was unlikely to persist into the second quarter. So the surprise [yesterday] was not that [the] deficit widened but by how much it did.”
Together with a main budget deficit of R180bn, this left the rand on an upside risk to inflation. “However, this is countered by weak GDP growth and allows for an unchanged repo rate until mid-2015.”
HSBC economist David Faulkner said: “There is scope for a gradual improvement in South Africa’s current account balance. The end of strikes and other supply disruptions… should support better export performance in the second quarter, while weak domestic demand should help curtail the pace of import growth.”