Turmoil in global financial markets makes it difficult for South Africa to finance its current account deficit, Treasury director general Lesetja Kganyago said on Tuesday.
South Africa has a nagging shortfall on its current account, which climbed to 7,3% of gross domestic product in 2007 from 6,5% the previous year, reaching its highest level since 1971.
The central bank has previously said the gap was comfortably financed by capital inflows.
”Today we still have a current account deficit, so it’s not a new risk … The risk now is that there is this global financial turmoil and its becoming difficult to finance the current account deficit,” Kganyago told a World Bank conference.
Kganyago said the gap was a manifestation of a savings imbalance, adding: ”We are predicting over the medium term that the current account deficit will remain high.”
In April Finance Minister Trevor Manuel said South Africa would be wise to increase household savings in the current economic climate, saying the country’s savings rate was not adequate at just under 14% of gross domestic product (GDP).
The South African Revenue Service said late last month a sharp rise in oil imports had pushed the trade balance to a R10-billion ($1,26-billion) shortfall in April, pointing to further pressure on the current account gap.
The rand, which has weakened about 14% against the dollar this year, is also feeling the heat.
Deficits to widen
The World Bank’s Global Development Finance report released on Tuesday said the current account deficits of South Africa, Lebanon, Pakistan, Romania and Ukraine were expected to widen in 2008, noting that in some instances foreign direct investment inflows covered the entire gap.
This did not however apply to South Africa, where FDI outflows have risen significantly.
”In the case of South Africa, FDI outflows are estimated to be roughly equivalent to FDI inflows in 2007, providing no net external financing,” the report said.
Global financial turmoil, sparked by a credit crunch with its roots in the US housing sector and exacerbated by rising food and fuel prices, has led to hesitancy to lend among major banks.
”It is striking now, if you look at individual countries and their vulnerability, that there is a very strong correlation between current account deficits and vulnerabilities… [and] the possibility of a sharp sudden slowdown in their domestic economy,” World Bank economist Hans Timmer, told delegates. – Reuters 2008