Rate hike won't help current account deficit

Johannesburg - Raising interest rates would not bring about a reduction in the size of South Africa's deficit, according to Investec.

The current account deficit widened in the second quarter of 2014 to R222.1bn, from R161bn in the first quarter.

"As a percentage of GDP, the magnitude of the current account deficit increased to 6.2% from 4.5%, and was larger than market expectations of a 5.5% shortfall," economist Kamilla Kaplan said in a statement on Tuesday.

The second quarter outcome was mainly determined by the underlying merchandise trade dynamics.

"Specifically, imports remained elevated in the second quarter of 2014 at R106.5bn, which was only a modest 2.5% decrease on the level of imports in the first quarter of 2014," she said.

"Moreover, this was outpaced by a 6.4% decline in exports, to R90.5bn in the second quarter of 2014 compared to the first quarter."

These dynamics therefore produced a merchandise trade deficit of R160.3bn versus a deficit of R125.5bn in the first quarter.

The other key consideration for the current account position in the second quarter was the outflow of dividend and interest payments, related to both portfolio and direct investments in preceding quarters.

Payments associated with direct investments totalled R82.7bn, while those related to portfolio investments totalled R48.7bn.

The cumulative outflow of R131.4bn far exceeded the cumulative inflow of investment-related receipts of R61.5bn.

"So far this year, the current account deficit has been influenced by substantial oil and capital goods imports and comparatively tepid export growth," Kaplan said.

"In this instance, raising interest rates further would not bring about a reduction in the size of the deficit."

In its quarterly bulletin released on Tuesday the SA Reserve Bank said the repercussions of the five-month-long platinum strike were still affecting the country's economy.

Real Gross Domestic Product (GDP) fell 0.6% in the first quarter of the year and then rose in the second quarter by an annualised rate of 0.6%.

"This barely positive growth rate was extremely disappointing given the country's development needs, and was mainly brought about by the drawn-out industrial action in the platinum-mining subsector which started on 23 January 2014 and only came to an end five months later."

South Africa would have been considered to be in a recession had there been two consecutive quarters of negative growth.

The GDP is the total value of goods and services produced in an economy over a certain period.

Since the economy was struggling to gain traction, and the consumer price index, a measure of inflation, was expected back in the three to six percent target band by year end, Investec expected no further interest rate hikes this year.