Michael Metelits
Despite the market’s negative reaction to Customs & Excise’s monthly trade figures released on Tuesday, South Africa’s outlook may not be as gloomy as indicated by the August statistics.
The figures showed a deficit of nearly R3-billion, a surprise to most analysts. They had expected a slight trade surplus.
Exports dropped massively in August, from R14,11-billion in July to R11,86- billion.
Imports rose slightly from R14,36- billion to R14,82-billion. The bond and currency markets reacted with a flurry of selling.
The August figures fuelled worries over South Africa’s balance of payments, or current account deficit.
But export-import statistics for the first eight months of this year indicated that traders overreacted to the August report. South Africa’s balance of payments from January through August was nearly level, with a deficit of only R257-million.
August’s trade imbalance may reflect South Africa’s position in the international system of trade and the current financial crisis more than structural problems with the country’s economy.
The International Monetary Fund’s (IMF) latest World Economic Outlook stresses this point in emerging markets. The IMF halved its estimate of world growth to 2% for the year and raised the possibility of a “deeper, wider and more prolonged downturn” than previously thought.
Significantly, the IMF mentions the South African economy as subject to gyrations from “continuing trade adjustments” in Latin America and Asia. The IMF projected South Africa’s 1998growth rate at 0,8% – much lower than the 3,7% it forecasts for the whole continent. These “adjustments” drive the monthly trade figures and generate medium-term patterns in trade.
Despite the IMF’s near-ritual advice to South Africa and other emerging economies to keep inflation low and not to introduce exchange controls, it acknowledges that decisions made in New York, London, Tokyo and Moscow will exert a major influence on the developing economies.
Tony Twine, an economist for Econometrix, agrees in principle that “going it alone” on currency issues would be a mistake, and that the major financial players’ risk aversion means that emerging markets – and South Africa specifically – “can’t rely on the surplus from the West”.
But does the monthly figure mean that much? And should current account problems be analysed using the monthly number? Some economists suggest not. The figures as reported definitely had a temporary impact on the financial markets, and through them, the real economy. But two leading economists argue that the monthly figures on trade data are too volatile to be used for prediction or analysis.
Nedcor chief economist Dennis Dykes argues that the original baseline for the monthly figure was quite low, indicating that it may climb before real statistical information can be drawn from it. Further, he suggests that due to exactly the kind of volatility seen in August, the figure is difficult to analyse.
The underlying figures in August seem to bear out Dykes’s approach. Imports were skewed by the purchase of a R1- billion aeroplane, and the export side saw a few unexpected declines.
Vehicles and vehicle equipment exports dropped 49,5% in August, and electrical equipment suffered a 19,4% decline. Jewellery and gold were hit with a 15,9% drop. “Export drops in these sectors are counter-intuitive,” says Dykes, emphasising the unexpectedness of the moves. Lower Asian demand is widely blamed for the lower export figures.
Cees Bruggemans, chief economist at First National Bank, agrees that the volatility of the monthly figure makes it virtually impossible to predict and thus discount in the marketplace. Bruggemans also suggests focusing on the components for any information about the trade figure and the real economy.
Both Bruggemans and Dykes point to data aggregated over a longer period for any valid information about international trade deficits and their impact on South Africa’s balance of payments. Quarterly data shows smoother trends up and down, according to Bruggemans, and is thus easier to draw conclusions from.
Dykes points out that Customs & Excise don’t use the monthly data when they’re analysing trade. They use cumulative and half-yearly data, which point up longer-term trends in international trade among the components of the aggregate trade figures.
And while much of the market activity and worry on Tuesday was based on projections about South Africa’s current account payments, Bruggemans specifically discounts using the monthly data to predict balance of payments issues.
He is in fact somewhat optimistic on the current account, saying he sees “the current account deficit reducing … [as] slower spending pulls imports down”. Despite the monthly spikes and troughs, Bruggemans’s analysis of medium-term tendencies in South African trade bodes well for our balance of payments.
What, then, does all this mean? Clearly, lower demand for South African goods from Asia will continue to have a negative effect on trade figures. Fewer exports means fewer jobs in manufacturing, and lower gold exports will hit a number of sectors of the economy, resulting perhaps in job losses and lower wages.
Lower imports, if they emerge, will, on the other hand, mean less foreign exchange will be spent on obtaining goods from abroad, a major factor in Wednesday’s 0,8% hike in the producer price index. South Africa, like the rest of the world, stands to lose out if aggregate demand shrinks due to global financial crisis and stands to gain if recent and anticipated interest rate cuts around the world boost that demand.
If interest rates around the world come down and that strategy is successful in raising worldwide demand and reversing the drift of the current crisis, South Africa’s trade balance will pick up as exports increase. If the current situation is not relieved, imports may drop due to lack of financing and may keep pace with declining exports.
The current account balance, like so many indices in South Africa’s economy, reflects the depth of our involvement with the worldwide economy and its current problems.