Rand falls as current account deficit widens
Fear of a global slowdown will affect SA’s momentum, say analysts
The current account deficit widened marginally to 3.5% of GDP in the third quarter from 3.4% previously, mainly due to the smaller trade surplus, data from the Reserve Bank showed on Thursday.
The current account is indicative of SA’s trade with the rest of the world. Compared to recent years, the deficit has narrowed significantly after averaging more than 5% of GDP between 2012 and 2015.
“What these numbers tell us is that SA’s vulnerability to external factors has increased, though not significantly. We are still relying more on external sources of funding to balance our books,” said ETM Analytics market analyst Halen Bothma.
On Thursday, the rand slid more than 2% to cross R14 to the dollar for the first time in about two weeks.
“This is likely related to other issues,” said BNP Paribas economist Jeff Schultz, citing the risk centre of emerging markets, trade tension and the “idiosyncratic risks” posed by Eskom.
“The current account would have been just one of many reasons, including external factors,” said Old Mutual Group economist Johann Els. “Most of the negative in SA is already priced in.”
Global markets tumbled on the news of the arrest of Chinese tech company Huawei’s CFO, Meng Wanzhou, in Canada. The move stoked tension between the US and China as Meng is reportedly facing extradition for allegedly violating sanctions against Iran. The move could scupper the trade truce the US and China reached last weekend.
The steep losses coincided with a big drop on Wall Street, with the Dow Jones industrial average sliding 2% during its early session. The JSE also suffered collateral damage on Thursday, dropping as much as 3% to 50,078.6 points, later recovering somewhat to close 1.75% lower.
“It’s the fear of a global slowdown ... and SA’s current account deficit widened. This will dampen SA’s momentum right now and is going to provide new headaches for the Reserve Bank,” said Marc-Andre Fongern, founder of German-based MAF Global Forex.
Schultz warned that SA is still running a twin deficit and not attracting enough foreign direct investment, which makes the rand volatile.
“The rand is likely to remain vulnerable in the event of a deterioration in investor risk appetite,” said Capital Economics economist William Jackson.
Els said investment is “pretty weak” at the moment but should improve.
The business confidence index for November, compiled by the SA Chamber of Commerce and Industry (Sacci), improved by a marginal 0.3 index points to 96.1 from the month before. This is one point higher than where it was in November 2017.
“The flattening of momentum in business confidence must be addressed in order to create a situation where investor confidence could be nurtured,” Sacci said on Thursday.