/ 28 January 2014

Economists warn SA is living beyond its means

The South African rand has depreciated the most out of 16 major currencies tracked by Bloomberg.
The South African rand has depreciated the most out of 16 major currencies tracked by Bloomberg.

One of the biggest factors for the rand depreciating was South Africans living beyond their means, FNB chief economist Sizwe Nxedlana said on Tuesday.

"We are essentially living beyond our means. Domestic import is significantly higher than domestic production," he explained.

Nxedlana said the income paid for the difference between export and production was known as the current account deficit. "The current account deficit is 6% of the gross domestic product or R200-billion and that deficit needs to be funded."

South Africa's deficit had been largely funded by foreign investors.

The announcement and implementation by the United States Federal Reserve to start tapering affected emerging markets and not just South Africa.

Tapering meant America would reduce the pace of its purchasing of assets to improve the conditions for economic growth. Nxedlana said this meant funding the deficit would become more of a problem and the rand had to act as a shock-absorber and therefore depreciated.

"So what happened was that the rand became a shock-absorber and supported the narrowing of the deficit," he said.

However, the depreciating rand could in the future become a turnaround for the currency as it made imports more expensive and exports more competitive.

Chief economist at the Efficient Group, Dawie Roodt, said because South Africans consumed more than the country produced, South Africa often had to borrow money. "Now our neighbours are asking for their money back." 

Roodt said the rand was undervalued when one used the Big Mac index to determine its worth internationally. The Big Mac index had been used since 1986 as a guide to the value of currencies.

Investec economist Annabel Bishop said the depreciation of the rand had not been rapid or severe. "Quantitative easing tapering is likely … priced in, and the rand should not weaken dramatically from this point," she said.

"Higher prices at the tills as a consequence of exogenous pressure such as rand weakness, or rising fuel or agricultural food prices [due to drought] do not necessarily imply that the consumer will absorb the rise in the cost of living."

She warned that the debt levels of consumers were high while the private sector employment prospects were weak and real disposable income growth was slow.

Investment strategist at Citadel Asset Management, Maarten Ackerman, said the rand could depreciate even further but it did not seem like the currency was overstretched compared to the period between 2001 and 2008.

He said the rand remained vulnerable because the appetite for emerging market assets could deteriorate.

"Given the uncomfortable current account deficit, it is difficult to see the currency appreciating significantly from current levels," he said.

"Less foreign capital inflows coupled with the size of the current account deficit will keep the currency under pressure despite solid capital flows into South Africa over the past two years."

The deteriorating local economic landscape, negative sentiment related to labour strikes, high unemployment and an unsustainable large current account deficit contributed to the rand depreciating, said Ackerman.

South Africa's current account deficit was the largest among emerging markets, said Ackerman.

Loss of confidence
Rand Merchant Bank currency strategist John Cairns said the depreciating rand was caused by loss of confidence in the emerging markets. 

He predicted a "volatile" year ahead. "Global monetary conditions are expecting to be tightened," he said.

Economists warned consumers to start budgeting and not to live above their means because the cost of imported goods would increase and ultimately cause inflation to increase.

Nxedlana said: "Consumers should become prudent and make sure they budget to ensure that they would be able to afford their debts if interest rates were to increase."

Roodt said now was the time for consumers to plan because the depreciating rand could mean a rise in food and petrol prices. Cairns warned that some consumers were essentially living beyond their means.

This would become even more of a problem should the Monetary Policy Committee of the South African Reserve Bank decide to hike interest rates in 2014.

Reserve Bank governor Gill Marcus will announce the interest rates on Wednesday afternoon. – Sapa