The current account deficit is growing. Drastic measures=20 must be taken now if the economic recovery is to be=20 sustained. Lynda Loxton reports
Economists, ever watchful for dark clouds on the horizon,=20 are tempering their delight about the continued strong=20 growth of the economy by worrying about the deepening=20 current account deficit.
And they received no solace from figures released by the=20 Reserve Bank this week which indicated that its gold and=20 foreign exchange reserves, the only real gauge of what is=20 coming into or going out of the country, had slipped even=20
The main causes of the deficit are the high level of=20 imports typical of any recovery and the fact that these=20 have not been matched by a similar rise in exports.
According to Southern Life economist Sandra Gordon, the=20 deficit this year could be as much as R4-billion, and R6- billion in 1996. Last year it was R2,1-billion, but was=20 more than offset by net capital inflows of R5,2-billion.
“As a result, the sustainability of the current recovery=20 depends fundamentally on the ability of the South African=20 economy to attract sufficient capital, not only to cover=20 the shortfall on the current account but also to meet the=20 still onerous debt repayments,” Gordon said.
Board of Executors senior portfolio manager Rob Lee warned=20 that the recovery was likely to be short-lived unless=20 drastic steps were taken to attract long-term capital.
He welcomed the fact that the recovery was being led by=20 private investment, but was worried that this was mainly=20 being financed by short-term foreign loans because of low=20 domestic savings.=20
Gordon said the fact that long-term investments were few=20 and far between could be attributed to the Mexican crisis,=20 which made many foreign investors very wary of emerging=20 markets. But Lee said he had detected another factor,=20 mainly uncertainty about “life after Mandela”.=20
The five-year bond issue of $750-million raised last year=20 was now trading at a premium and it was obvious that “there=20 is a great deal of reluctance on the part of foreigners to=20 lend money beyond the time frame of the next election” when=20 President Nelson Mandela has said he will step down.
“Existing loans of up to three years’ maturity are=20 apparently referred to by some foreign investors as=20 ‘Mandela put options’ — that is, investors will be repaid=20 while President Mandela is likely to be still around,” Lee=20
To counter this, Lee and others recommend a more radical=20 and imaginative approach to economic management to attract=20 capital inflows. Gordon said this could include=20 privatisation and the further lifting of exchange controls.=20
But as Public Enterprises Minister Stella Sigcau indicated=20 at the Financial Times conference in Cape Town last week,=20 the government is in no hurry to privatise anything and,=20 indeed, prefers to talk about restructuring rather than=20
This indicates that a massive sell-off of state assets is=20 not on the cards immediately.
At the same time, Finance Minister Chris Liebenberg said in=20 Tokyo this week that radical action to remove remaining=20 exchange controls was not likely for at least a year and=20 that slow change was more probable.
This cautious approach might be commendable, but as Old=20 Mutual economist Rian le Roux has warned, such caution=20 could lead to South Africa missing the boat to sustained=20 economic growth.=20
He said the government should use this period of strong=20 growth to deal with the structural changes that were needed=20 in the economy, including privatisation, cutting back on=20 government spending and reducing trade protection.
These steps would not be without some pain, but it would be=20 easier to weather them now, and Le Roux feared that tough=20 decisions would be postponed precisely because times were=20
“South Africa must avoid this trap,” Le Roux said. Lee=20 predicted that if South Africa did not act now on these=20 issues, the present recovery would be short-lived and “turn=20 out to be of the familiar stop-go variety”.
What does all this mean for the average person? For one=20 thing, domestic interest rates will have to remain high to=20 attract foreign capital in an increasingly competitive=20
Some economists predict at least another one percentage=20 point hike in interest rates this year and possibly another=20 one next year. That is bad news for bond holders and people=20 who live extensively on credit.