South Africa’s ‘Achilles Heel’ May Be on the Mend: Week Ahead
South Africa’s current account deficit, which the government describes as the Achilles heel of the economy, may have narrowed in the second quarter, prolonging a surge in the rand.
The country’s first recession in 17 years has come to the government’s aid, slashing imports just as exports of platinum and other metals rebound, after years of reliance on volatile foreign investment in stocks and bonds to finance the deficit.
“Imports are very weak because of the general weakness in the economy,” said Elna Moolman, an economist at Barnard Jacobs Mellet Holdings Ltd. in Johannesburg. “The current account deficit should become less of a factor in investors’ decisions in South Africa. That’s positive for the rand.”
The currency has rallied 36 percent against the dollar since March as the first signs of a pick-up in the global economy help restore foreign portfolio investment in emerging markets. With the current account gap now narrowing, the rand is unlikely to lose those gains and may even rise further.
The deficit, the broadest measure of trade in goods and services, shrank to a four-year low of 4.3 percent of gross domestic product in the second quarter, according to the median estimate of 11 economists surveyed by Bloomberg. The central bank will publish the data at 12 p.m. in Pretoria on Sept. 3.
The shortfall compares with 7 percent of GDP in the previous three months and a record 8.8 percent in the first quarter of 2008.
The deficit is the “Achilles heel of the South African economy,” the government said in a report on April 16, adding that the global crisis makes financing the shortfall a “concern” and a hindrance to faster economic growth.
Contraction
Africa’s biggest economy contracted an annualized 3 percent in the three months through June, the third consecutive quarterly decline. That curbed demand for imports, which rose by less than 1 percent in June from the previous month after falling 6.4 percent in May, the South African Revenue Service said on July 31.
“We have to attract foreign investment because savings are low,” Finance Minister Pravin Gordhan said on July 23. South Africa’s savings rate of 17 percent of GDP is “not high enough for the investment needs in South Africa.”
The rand has climbed 21 percent against the dollar this year, the second-best performer of 16 major currencies tracked by Bloomberg, partly because of an improvement in the current account deficit, said Jean-Francois Mercier, an economist at Citigroup Inc. in Johannesburg.
Dependent
“The rand is dependent on strong portfolio inflows” to finance the deficit, Mercier said. “If the projection is that the current account deficit will stay low, then that’s better” for the currency.
The National Treasury forecast on Feb. 11 that the current account shortfall will reach 6.3 percent of GDP this year, down from 7.4 percent in 2008.