South Africa’s yawning current-account deficit will remain the bugbear of the country’s economy, with figures on Thursday due to show the gap hovering near record levels in the second quarter of 2006.
The Reserve Bank’s quarterly bulletin on Thursday will reveal whether there was any narrowing of the shortfall on the country’s broadest measure of trade, which widened to a 24-year record in the first quarter of 2006, shocking local markets.
A persistent large deficit will weigh on the currency, pushing up inflation and forcing interest rates higher, Reserve Bank Governor Tito Mboweni warned last week.
”It may even just get worse before it gets better,” Brait economist Colen Garrow told Reuters. ”I have a feeling that the numbers are still going to remain high and that the market will be unsatisfied.”
The current-account deficit widened to 6,4% of gross domestic product (GDP) in the first quarter of the year, its worst since 1982. In value terms the shortfall amounted to a record R103,1-billion.
In an annual economic report last month, the South African Reserve Bank said the deficit averaged about 6,1% of GDP for the first half of the year — suggesting it narrowed in the second quarter — but analysts are bracing for bad news.
”It’s [the current account] probably going to be slightly worse from what we saw in the second quarter … it’s just going to be about how bad is it,” ETM analyst George Glynos said.
Downward revisions of the first quarter figure may still show that the gap deteriorated in the second, while pre-emptive imports following the rand’s slide since May could keep the deficit wide near-term.
Economists say a government infrastructure spending drive over the next few years will also put pressure on the balance through import demand, with about R700-billion of spending earmarked for the coming 7 years.
”Overall we expect the current account to remain under pressure. The structural imbalance in the economy is far from solved,” Glynos said.
Exporters struggle
A sustained three-year rally in the rand from a record low of 13,85/dollar late in 2001 has helped spur the growing influx of imports, eroding the competitiveness of South African exports and stealing market share from local manufacturers.
The trend has consistently widened the trade gap, while the services component on the current account has swelled on dividend payments on foreign investments in South Africa. South Africa’s trade deficit hit a record R7,75-billion in July.
So far the current account gap has been covered by portfolio inflows and the Reserve Bank is hoping this trend will continue.
Figures show that foreigners have been divesting from the local equity market in the past two months, but shifting into government bonds rather than withdrawing completely.
Mboweni warned last week that the current account deficit may take a rising toll on the economy if it forced the rand to depreciate further, fanning imported inflation pressures and prompting further increases in interest rates. — Reuters