Jitters over current account deficit

Reserve Bank governor Gill Marcus may – or may not – hike interest rates. (David Harrison, M&G)

Reserve Bank governor Gill Marcus may – or may not – hike interest rates. (David Harrison, M&G)

The South African Reserve Bank’s quarterly bulletin revealed a surprise widening of the current account deficit on Tuesday (September 9), fuelling speculation over its pending interest rate decision when the monetary policy committee meets next week.

The data follows South Africa’s narrow escape from recession last month, when gross domestic product (GDP) growth increased by a mere 0.6% after a quarterly decrease of 0.6%.

But Business Unity South Africa (Busa) said on Wednesday that the debate over the central bank’s interest rate decision and its impact on the economy placed an “inappropriate” burden on the bank, as it was just one factor in economic growth.

The country needed to address other challenges, including skills, education, labour legislation and uncertainty of the implementation of policy to spur on economic growth, Busa said.

The current account deficit for this year’s second quarter has widened beyond market expectations, from 4.5% of GDP to 6.2%. The current account forms part of the country’s balance of payments, a measure of its trade with the rest of the world.

Elevated imports
According to an Investec economist, Kamilla Kaplan, the increased deficit was owed mainly to underlying merchandise trade, specifically imports, which remain elevated at R106.5-billion – only a 2.5% decline from the first quarter.

This was outpaced by a 6.4% decline in exports to R90.5-billion, she said in a research note. Oil imports contributed to the high import numbers, driven in part by Eskom’s reliance on open-cycle gas turbines, which are fed on liquid fuel, to ensure electricity supply.

The other key factor was the outflow of dividend and interest payments, related to both portfolio and direct investment in preceding quarters, Kaplan said.

Payments associated with direct investments totalled R82.7-billion and those related to portfolio investments totalled R48.7-billion.
The cumulative outflow of R131.4-billion far exceeded the cumulative inflow of investment-related receipts of R61.5-billion, she said.

The sharp increase in the current account deficit had “muddied the waters”, according to FNB economist Alex Smith, as it put pressure on the rand in the short term.

‘More benign outlook’
But Smith did not expect the monetary policy committee to raise rates again this year, largely because declines in the prices of oil, food and commodities in general had created a “slightly more benign inflation outlook”.

Moreover, the European Central Bank last week cut interest rates and indicated it would begin buying assets-backed securities, essentially beginning quantitative easing, he said. “That announcement implies that global liquidity conditions are likely to be a little bit more favourable than initially thought.”

This in turn meant there might be less stress when it came to funding the current account deficit.

But the overriding feature, Smith said, was that inflation was declining and, at next week’s meeting, the Reserve Bank might have to revise its inflation forecast downwards. The reduced inflation risk meant there was “no particular need to hike interest rates in the short term, particularly in light of the weakness in the domestic economy”, Smith said.

Kaplan also expected the Reserve Bank to hold off further hikes this year. “So far this year, the current account deficit has been influenced by substantial oil and capital goods imports and comparatively tepid export growth. In this instance, raising interest rates further would not bring about a reduction in the size of the deficit,” she said.

Monetary policy
The bank had also reaffirmed its dependence on data in deciding monetary policy, Kaplan said.

“As such, given that the economy is struggling to gain traction and given the likelihood of [consumer price inflation] moderating back into the target band by year end, we expect no further interest rate hikes this year.”

Although Busa would prefer the repo rate (the rate at which the central bank lends to commercial banks) to remain steady, as this would play a role in promoting growth, it said it was “a small factor in the overall context to be created for economic growth”.

It called on the monetary policy committee to send out a clear message that “skills, education, labour legislation, lack of competition in some sectors and uncertainty in policy implementation must be addressed to spur economic growth”, and that it was not the Reserve Bank’s role “to use only interest rates as a tool for economic growth”.

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