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SOUTH Africa's trade deficit ballooned in the first quarter
of this year as exports underperformed.
The trade data are crucial for the rand, and are a negative
signal for the rand exchange rate. However, there are many factors other than
trade that affect the rand, and these might counteract the bad trade figures.
When imports exceed exports a trade deficit exists. It's
easy to see why this would be bad news for the rand's exchange rate, as it
means South Africans are paying more foreign exchange for goods than they are
receiving for their exports.
However, this outflow of foreign currency is just one of
many flows through the market.
To understand the flows, we first have to understand the
full current account deficit, of which the trade deficit is a component. The
current account deficit is broader than just trade in goods, as it includes
"invisible" trade such as services and payments such as interest and
dividends.
In SA, trade in "invisibles" is usually in
deficit, adding to the outflow of foreign currency from the country. The flows
from this account, usually referred to as the services deficit, are only made
known once a quarter, when the current account deficit is released.
Trade in goods, however, is updated monthly. Although the
monthly trade figures are erratic, one can draw conclusions from the performance
over a quarter.
Though the trade deficit narrowed to R5.5bn in March, it
followed two months of exceptionally high deficits which pushed the trade
deficit for the first quarter of this year to R26.4bn from R12.9bn in the last
quarter of 2011.
Nedbank economist Johannes Khosa points out that this is the
largest shortfall on the trade account since the third quarter of 2008. Though
Khosa doesn't say this, during 2008 the current account deficit was a major
headache which aggravated rand depreciation during the financial crisis that
prevailed at the time.
Khosa says: "The trade account will remain volatile,
but mostly under pressure during the year, with export performance hurt mainly
by persistent weakness in Europe and slower global growth, while imports will
be supported by stronger fixed investment (capital expenditure) activity."
The current account explains only one leg of the flows
through the forex market. (Collectively, these flows are known as the balance
of payments, BoP, or the external balance of the country.) The other leg of the
BoP, the capital or financial account, is made up of investment flows.
These include very short-term, speculative inflows taking
advantage of SA's higher interest rates, as well as long-term foreign direct investment.
When capital inflows exceed the current account deficit, the rand should
strengthen.
However, we have to bear in mind that the exchange values of
major currencies such as the dollar and the euro also affect the rand's value.
If the dollar is strengthening against major currencies, it's likely that the
rand will weaken against the dollar, even if capital inflows exceed the current
account deficit.
However, the rand won't depreciate by as much as other
currencies in that case.
SA has experienced a surge of foreign capital inflows this
year, especially since Citigroup announced in April that SA is likely to be
included in its World Government Bond Index from October. Inclusion in this
kind of index means that global index tracker funds, that manage trillions of
dollars in investments, have to invest in SA to meet the requirements of their
mandates.
That means that SA gets a captive overseas market for its
bonds, which means foreign investment in government paper will be a more stable
and reliable source of foreign inflows than it has been in the past.
Bond and equity flows are known as portfolio flows. Foreign
equity investment in SA has been negative for some time now, recording outflows
last year and for the year to date. Bond inflows surged on the Citigroup news,
reflecting both speculators and real money flows in anticipation of inclusion
in the index in October.
Latest figures show that for the year to date, bond inflows
have been R33bn, close to the inflows for the full year last year of R42bn.
Citigroup estimated that the inclusion in the index could generate around $5bn
in inflows since the announcement last month and mid-October, and possibly
another $2bn thereafter.
- Finweek
* Greta Steyn writes for Finweek magazine, South Africa's leading financial news publication. Follow Finweek on Twitter@finweek or visit www.fintalk.co.za.
