South Africa’s current-account deficit widened sharply in the fourth quarter of 2006 and the South African Reserve Bank will continue to monitor the shortfall and possible currency depreciation, Governor Tito Mboweni said on Tuesday.
However, he stressed that the deterioration could be put down to an exceptional rise in oil imports towards the end of last year and urged the market not to draw ”inappropriate conclusions”.
The Reserve Bank is set to unveil the fourth-quarter data on Thursday with large monthly trade deficits during that period likely to have pushed the current-account gap to record levels.
Analysts are expecting a shortfall of about 7% of gross domestic product (GDP), compared with 5,2% previously.
”In the fourth quarter of last year, we experienced a significant widening in the current-account deficit, with the deficit on the trade account of the balance of payments having more than doubled from the third to the fourth quarter,” Mboweni said in a speech published on the bank’s website.
The increase could be ascribed to a 140% increase in the volume of oil imports during that period.
”It is important to highlight that the related inventory build-up appears to be exceptional, and it is unlikely that oil imports will be maintained at these levels.”
Taking out the impact of the oil imports, the deficit would have been comfortably less than 6% of GDP in the fourth quarter, he said.
South African refineries ramped up oil imports in October last year after reopening following maintenance shutdowns, lifting the monthly trade deficit to a record R12,9-billion. It narrowed only slightly to R10,5-billion in November.
Weighed on rand
The country’s gaping current-account shortfall has weighed heavily on the rand currency, contributing to its 10% fall against the dollar and almost 20% against the euro in 2006. It has lost about 6% this year to R7,40 to the dollar.
But the fall followed three years of relative strength after hitting an all-time low of R13,85 in late 2001, which boosted imports and cut into the profitability of exporters.
Mboweni said South Africa has been able to finance the deficit with relative ease due to the positive prospects for economic growth, adding that faster growth and robust capital expenditure have contributed to the size of the shortfall.
A large part of the imports are also capital goods that will further lift productive capacity and help boost exports in the years ahead.
But Mboweni said the bank’s monetary policy committee will continue to monitor developments around the current account and the ”potential risk to the inflation outlook stemming from the possible currency depreciation”.
”It is, however, important for the market to analyse the drivers of the current-account deficit, [and] understand the underlying trends and qualitative dimensions rather than to concentrate on what the mere figure as a percentage of GDP is and possibly draw inappropriate conclusions,” he said.
The monetary policy committee last month halted a six-month, 200-basis-point upwards interest-rate cycle, citing a better inflation outlook, and said it was not targeting the current account.
Mboweni also said South Africa’s economic expansion of about 5% of GDP is not necessarily inflationary as research has shown the faster growth is of a structural nature. — Reuters