Johannesburg - The rand fell to a new record low against the dollar yesterday after a report by the Reserve Bank showed that South Africa’s current account widened in the third quarter, while manufacturing and mining output declined in October.
The elevated current account has always been a bugbear of the economy and has remained worryingly large.
Rating agencies have fingered South Africa’s current account and fiscal deficits, as well as poor economic growth, as a threat to fiscal and monetary policy.
Lowest level ever
The sentiment that was expressed by Standard & Poor’s on Friday when it changed its economic outlook on South Africa to negative. The rand yesterday softened to as low as R14.7009, the unit’s lowest level ever against the dollar, before by 7pm being quoted at R14.5961, which is 0.49 percent weaker than late trade on Monday.
This was in line with emerging market stocks which extended their four-day losing streak yesterday as bourses and currencies came under pressure from weak China trade data and the fall-out from Monday’s oil price rout.
The widening of the current account shortfall signals further pressure on the rand as markets brace for higher US interest rates.
Bart Stemmet, an analyst at NKC African Economics, said the rand was already in a weaker trend and should the US rate hike cycle trigger marked shifts in capital flows away from South Africa, it could be in for further losses.
He said South Africa’s structural current account shortfall was expected to remain a concern over the medium term amid the new normal of low-trending commodity prices.
The current account gap has traditionally been partly financed by portfolio inflows, but these have waned this year as investors expecting the US Federal Reserve to start tightening monetary policy dumped emerging markets.
Market expectation was a 4 percent current account shortfall in the third quarter. Imports rose more strongly than exports during the quarter, leading to a R14 billion shortfall in the trade balance following a surplus of the same margin in September.
Investment into local stocks and debt had tapered off sharply to R11.8bn in the third quarter from R54.8bn in the prior quarter.
Offset
“Non-resident investment in South African equity and debt securities was more than offset by the acquisition of foreign portfolio assets by South African investors,” the Reserve Bank said. The economy, which narrowly avoided a recession in the third quarter and is expected to grow just 1.5 percent in 2015, ticked up by an annualised 0.7 percent during the third quarter after contracting by 1.3 percent previously.
Government spending rose at a slightly faster pace of 1 percent compared with 0.4 percent in the second quarter.
This offset a moderation to 0.9 percent from 1.2 percent in household spending growth, due to a slowdown in real income expansion and persistently low consumer confidence levels.
Annabel Bishop, the chief economist at Investec, said she continued to expect the current account deficit would be 4 percent of gross domestic product (GDP) in 2015, up from 5.4 percent in 2014.
She said 2016 was likely to see a current account deficit print of minus 4.2 percent of GDP, moving to minus 4.5 percent of GDP over the medium term as oil and general commodity prices remained low, with China’s rapid growth development phase likely to be over.
Declines
Manufacturing output fell 2.1 percent year on year in October after rising by a revised 1.2 percent in September, Statistics SA said yesterday.
Market expectation was for a 0.5 percent contraction. On a month-on-month basis, factory production was down 1.7 percent, but was up 1.6 percent in the three months to October.
Of the 10 broad manufacturing categories, six recorded declines. This was after manufacturing, which contributes slightly more than 12 percent to the economy, led third quarter GDP recovery.
Manufacturing output expanded for the first time since the fourth quarter of 2014.
Nedbank economists Dennis Dykes and Busisiwe Radebe said the effects of the global commodity price slump would weigh heavily on production, exports and profits in most of the major export-orientated industries for some time.
They said the strain was already visible in the local steel industry, with many firms reporting heavy losses, some placed under business rescue, and most downscaling operations dramatically.
“Given the weak global commodity markets and the slide in most other emerging market currencies, the weaker rand is unlikely to provide a major competitive boost to local producers in this business cycle.”
Mining production contracted by 4.6 percent in October after a drop of 4.7 percent in September.
It fell by 9.8 percent in GDP growth in the third quarter.
* Additional reporting by Reuters and Bloomberg
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