Current account deficit shock for SA

Sep 11 2012 16:59
Johannesburg -  South Africa's current account recorded its largest deficit in nearly four years in the second quarter of 2012 as exports fell because of subdued external demand that is likely to hit manufacturing throughout the rest of the year.

The Reserve Bank also said labour unrest in the mining sector - in particular, fallout from the police shooting of 34 striking miners at a platinum mine last month - might cause economic growth to slump in the third quarter. A 30% rise in mining output propped up the economy in the second quarter.

In its latest Quarterly Bulletin, released on Tuesday, the bank said the current account gap widened to R200bn or 6.4% of GDP from 4.9% in the first quarter, while state spending on wages pushed gross domestic expenditure to 4.7%.

Economists had expected a deficit of only 4.7% because of record portfolio flows into South Africa's domestic debt market ahead of its inclusion in the prestigious Citi World Government Bond Index (WGBI) on October 1.

Bond yields have hit a string of record lows since the WGBI inclusion was announced in April, with index-tracking investors forced to increase their holdings of South African debt.

Economists said these flows could not fund the deficit forever, suggesting the rand was vulnerable if global appetite for emerging market assets switched.

"This is an unsustainable current account deficit," said Kevin Lings, chief economist at Stanlib.

"What is bailing us out is our inclusion in the Global Bond Index, which has resulted in the massive inflows into our bond market. We will still end up with a record inflow into the bond market and that is what is helping us to finance this."

The rand eased after the data, hitting R8.2225/$ at 11:15 from R8.21 moments before the release.

Pressure on factories
Separately, data showed a recovery in manufacturing output to a 10-month high in July, although economists said they still expected the sector, which contributes 15% to gross domestic product, to moderate in the coming months.

Manufacturing output grew 5.8% year-on-year in volume terms, broadly in line with expectations after a rise of just 0.9% in June.

"The outlook for the rest of the year remains relatively bleak," said Nedbank economist Busisiwe Radebe.

"Recession in Europe, a subdued US economy and slower growth in China and other major emerging markets will weigh on the sector, undermining production, inventories and capital expenditure by the major export-orientated industries."

The central bank surprised investors in July by reducing rates for the first time in 20 months, putting the repo rate in Africa's biggest economy at a 40-year low of 5%.

However, a jump in household and government spending in the second quarter caused some economists to wonder whether this decision would be reversed shortly.

"When you look at the driver of it, it is very clearly household and government debt which is expanding at a time when South Africa's production is under massive pressure," said George Glynos, managing director at ETM.

"It raises questions about the wisdom of having cut rates and raises the prospect of rand and price volatility."

The bank also said overall third quarter output might drop against a surprisingly strong showing in the previous three months by the volatile mining sector, which accounts for 6% of production.

Mining grew by 31.2% from a 16.8% contraction in the first quarter, helping push GDP growth to 3.2%, but a wildcat strike and shut-down at Lonmin's Marikana mine over the last month may reverse this.

"The interpretation of GDP has to look at the base effect of mining, and that the non-primary sector of the economy has slowed down. The boost we got from mining may come to haunt us in the next quarter," said Rashad Cassim, the bank's head of research.

The bank cut its 2012 GDP forecast in July to 2.7% from 2.9%, while the finance minister has said he will cut his own forecast to below 2.7% in October.

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