SA’s current account battle is falling short

Commodity prices, power shortages conspire against it.

South Africa’s efforts to shrink the current-account deficit are falling short as the benefits of a weaker rand and low oil prices are negated by power shortages and the broader slump in commodities.

The gap on the measure, the broadest gauge of trade in goods and services, probably narrowed to 5.8% of gross domestic product in the fourth quarter, down 0.2 percentage point from the prior period, the median estimate of 12 economists surveyed by Bloomberg shows. The National Treasury forecast an average 4.5% deficit for the year in the Feb. 25 budget.

While the rand has slid 6.6% versus the dollar this year and crude is down 51% since the 2014 peak, exports from the nation are being hurt by a four-year decline in prices for commodities including gold and platinum. The economy is also being crimped by rolling blackouts that prompted the Treasury to shave 0.5 percentage point off its 2015 growth forecast.

“The persistently wide current-account deficit is a perennial concern for South Africa,” Phoenix Kalen, a London- based strategist at Societe Generale SA, said by phone on March 13. “The capacity constraints in energy supply are aggravating the situation, limiting the country’s output and constraining the pace of improvement.”

Spread widens

The current-account gap hasn’t been below 4% of GDP since the fourth quarter of 2011, data compiled by Bloomberg show. The lowest forecasts in the Bloomberg survey were for a shortfall of 4.7%, from Gina Schoeman, an economist at Citigroup Inc., and the University of Stellenbosch’s Bureau for Economic Research. The report is due be released at 10 a.m. local time on Tuesday.

The premium investors demand to hold the country’s dollar bonds rather than U.S. Treasuries has widened to 291 basis points since reaching a 16-month low of 195 on Sept. 8, JPMorgan Chase & Co. indexes show. South Africa’s spread has increased as the power outages damped the growth outlook.

Finance Minister Nhlanhla Nene expects the current account to improve as the rand weakens. The currency gained 0.7% to 12.3885 per dollar by 3:34 p.m. in Johannesburg after slumping 3.5% last week.

“Weakness in the rand has increased the competitiveness of domestic exports,” Nene said in a March 13 speech in Johannesburg. “South Africa’s flexible exchange rate has acted as an effective shock absorber for global disturbances and volatility.”

Less optimistic

The data paint a less optimistic picture, said Goolam Ballim, chief economist at Standard Bank Group Ltd., South Africa’s biggest lender by assets. The country lost 15% of its share of global exports since 2011 even as the rand weakened 25% on a trade-weighted basis, according to Standard Bank research.

The trade deficit ballooned to R24.2 billion in January, the largest since at least 2010, after metal exports tumbled and oil imports surged 64% as companies took advantage of the lowest prices in almost six years.

Gold mining production slumped 28% in January, while output of platinum-group metals fell 14.1%, amid slumping prices and power rationing. Gold prices are down 13% over the past 12 months, while platinum has dropped 24%.

Rolling blackouts

State power utility Eskom Holdings SOC Ltd. has been struggling to meet demand after the country failed to invest adequately in generation in the 20 years after the first democratic elections in 1994. Rolling blackouts have been implemented on 18 days this year as part of a plan to ward off a collapse of the grid serving Africa’s second-biggest economy.

The electricity shortage together with low global demand, labor unrest and rigid hiring and firing laws have deterred companies from investing in new capacity and ramping up exports, according to Ballim at Standard Bank.

“Normally, small open economies would look to a weak currency to remediate the current-account deficit,” he told reporters in Cape Town on March 11. “We have weak growth, we have a weak currency and yet we have this large current-account deficit. There’s a disjunction.”

©2015 Bloomberg News


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