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Johannesburg - The rand is proving to be a double-edged sword for the nation’s current account deficit.
While the currency’s slump to a 13-year low this month against the dollar should be benefiting exports, that’s being offset by rising import costs at a time when electricity utility Eskom is buying more diesel to run emergency gas turbines because of a power shortage.
The weaker rand has pushed inflation to the highest this year and fuelled a sell-off in bonds. An index of South Africa’s local-currency debt lost 3% for dollar investors this quarter, compared with average gains of 0.4% among 31 emerging markets tracked by Bloomberg.
The rand’s drop probably didn’t boost exports enough to narrow the deficit on the current account, the widest measure of trade in goods and services, in the first quarter. A SA Reserve Bank report on Tuesday will show the shortfall unchanged at 5.1% of gross domestic product, according to the median estimate of 15 economists surveyed by Bloomberg.
“With Eskom’s operation of diesel-powered stations, it definitely will push the oil import bill higher,” Isaac Matshego, an economist at Nedbank Group in Johannesburg, said by phone on Friday. “The weaker rand is definitely putting pressure on the import bill.”
South Africa ran a R32.6bn shortfall on its trade account in the first three months of the year, compared with R27bn in the same period last year, according to data from the South African Revenue Service. Eskom says it will need an additional R10.9bn to import diesel in 2015 as it struggles to meet demand for electricity.
Power crisis
The utility is running diesel plants to augment power supply and limit load shedding. Eskom has increased rationing of electricity since November because of plant breakdowns and delays in bringing new facilities online. The power crisis in stifling factory production and curbing the ability of manufacturers to boost exports and take advantage of the weaker rand.
Finance Minister Nhlanhla Nene estimates the electricity shortage will limit economic growth to 2% this year, short of the 5% the government says the country needs to slash a 26% unemployment rate.
South Africa, and the rand, is also vulnerable to a reversal of the capital inflows that fund its current account deficit as investors prepare for the US Federal Reserve to increase interest rates this year. Foreign investors reduced purchases of South African bonds to R128m last month, from R15.2bn in April.
Weak sentiment
The yield on the benchmark rand bond due in December 2016 rose to 8.47% last week, the highest level in 14 months. The rand gained 0.7% to R12.1643/$ on Friday in Johannesburg, trimming the decline this year to 4.9%.
“Speculation surrounding the start of Fed policy tightening has sparked a sell-off across emerging market assets, and sustained pressure on South Africa’s bonds,” Anisha Arora, an economist at London-based 4Cast, said by e-mail on June 18.
“It is difficult to expect a narrowing of the current account balance when sentiment towards South Africa remains weak, given the persistent issues with power supply.”
