South Africa’s deficit on the current account narrowed in the second quarter of 2006 while domestic spending slowed, easing fears interest rates would have to rise steeply in the continent’s biggest economy.
The shortfall on the current account, the broadest measure of trade in goods and services, narrowed to 6,1% of gross domestic product (GDP) from a 24-year record of 6,4% in the first quarter, the South African Reserve Bank said.
The news briefly boosted the rand currency and prices for short-dated government bonds, which have been knocked by expectations interest rates will rise by another full percentage point this year after climbing by that amount since June.
South African Reserve Bank Governor Tito Mboweni has repeatedly warned that a persistently large current account deficit will put more pressure on the rand, fanning inflation and eventually forcing interest rates higher.
”It is in line with expectations but the numbers confirm that the current account is under pressure,” said Pieter Laubscher, economist at the Bureau for Economic Research.
”It will still take some time before we will see the benefits of the weaker rand.”
The local currency has depreciated by about 15% against the dollar so far this year, and dived to a two-and-a-half-year year low of 7,54 per dollar in late June, after the Reserve Bank published the current account shortfall for the first quarter.
But sustained gains since the rand hit a record low of 13,85 per dollar late in 2001 have eroded South Africa’s exports, particularly in the key mining and manufacturing sectors.
The improvement in the current account during the second quarter was mainly due to lower service costs, and defied a further deterioration in South Africa’s trade balance, the bank said in its September quarterly bulletin.
In currency terms, the deficit fell marginally to R101,7-billion in the second quarter from a record R103,1-billion previously, it added.
Spending down, but still buoyant
The Reserve Bank said growth in domestic spending, one of the main drivers of economic growth, slowed to 7,5% in the second quarter, down sharply from 14,5% in the previous period, but still robust.
Household debt as a percentage of disposable income climbed to a new record of 69,75% from 68% in the first quarter, showing that demand for credit and consumption remained robust in the second quarter.
Higher interest rates are likely to temper spending in the months ahead, after the Reserve Banks raised its key repo rate by one percentage point to 8% in two stages since June. — Reuters