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Narrowing of current account deficit to be slow, economist warns

Absa Capital economist Peter Worthington

Absa Capital economist Peter Worthington

16th October 2014

By: Terence Creamer

Creamer Media Editor

  

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Corporate and investment banking group Absa Capital says that, while the “worst is probably over”, South Africa’s current account deficit is likely to narrow only slowly in the coming year, owing to weakening terms of trade.

Economist Peter Worthington noted that, at 6.2% of gross domestic product (GDP) in the second quarter, the deficit was bigger than expected, owing to a mix of lower platinum group metals (PGM) exports and the normalisation of dividend inflows. But the July trade deficit also “surprised negatively”, as a result of the lingering and cumulative effects of the PGM sector strike.

He said the balance of trade in manufactured goods was improving, supported materially by South Africa’s fast-growing neighbours, which already absorbed nearly half of the country’s manufactured exports.

“However, gains here will be partly offset by falling commodity prices,” Worthington warned in the Barclays-affiliate’s fourth quarter outlook statement.

Iron-ore prices had fallen 37% since the start of the year, while coal prices has fallen 18%. Volumes of gold and PGM exports, which together accounted for 20% of export earnings in 2013, might also soften as miners considered closing lossmaking shafts, he warned.

“The big question for the current account is whether imports adjust suddenly downwards, given the weakness of domestic demand. Certainly, the decision (as part of Eskom’s bailout package) to forgo the use of open-cycle gas turbines, which cost a huge 0.3% of GDP per year in imports of diesel to run, will help the import bill.”

But an ongoing need for capital equipment for the public infrastructure programme, as well as other essential goods such as crude oil, suggested that import demand was unlikely to slow materially in the near term.

“Over the longer term, however, we expect some further adjustment in imports of consumer and intermediate goods (plastics and chemicals for example), where the weaker rand should encourage some expenditure switching towards domestically produced alternatives to imports.”

Absa Capital was forecasting that the current account deficit would average 5.5% of GDP in 2014, marginally lower than the 5.8% recorded in 2013. However, its forecast for 2015 was for the deficit to remain at 5.3% of GDP.

“The relatively large current account deficit will leave the floating exchange rate at risk of any sudden abatement of portfolio or other capital inflows.”

The bank expected the rand:dollar exchange rate to touch R11.50 by year-end and to lose further ground in 2015, especially as expectations increase that the US Federal Reserve would move to hike rates during the year.

Edited by Creamer Media Reporter

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