Current account deficit shrinks to nine-year low
Narrowing of the deficit suggests the country is less vulnerable to changes in foreign investor sentiment, says Kevin Lings
SA’s current account deficit shrank sharply in the fourth quarter, largely due to lower imports, underscoring the weakness in an economy that slipped into recession in the closing months of 2019.
Though the decline to a nine-year low on a quarterly basis underscored the poor shape of SA’s economy, the outcome leaves SA “less vulnerable” to changes in foreign investor sentiment at a difficult time for the country, said Stanlib chief economist Kevin Lings.
As a ratio of GDP the current account deficit narrowed to 1.3% in the fourth quarter of 2019 from 3.7%, data from the SA Reserve Bank showed on Thursday. On an annual basis, the ratio narrowed to 3% in 2019 from 3.5% in 2018.
The current account is a measure of SA’s trade in goods and services with the rest of the world. SA relies on foreign inflows from the rest of the globe to finance the deficit.
The narrowing of the deficit is helpful at this stage as it suggests the country is less vulnerable to changes in foreign investor sentiment, said Lings. Heightened worry over the spread of the coronavirus, SA’s vulnerability to a credit ratings downgrade to junk status by Moody’s Investors Service and weak economic growth “can create a headache at exactly the wrong time”, he told Business Day.
A deficit at these levels “takes away some of that vulnerability”, he said.
SA’s current account deficit has been a key factor in why the Reserve Bank has remained cautious about cutting interest rates, despite SA inflation remaining well under control, according to Lings. A sharp reduction in SA interest rates could make it more difficult for SA to attract the foreign investment required to fund the deficit.
The Bank is due to make its next interest rate decision on March 19.
Fears over the spread of the virus have seen central banks like the US Federal Reserve call an emergency meeting to cut rates to head off the economic effects of the disease’s spread. The news of SA’s recession has added pressure on the Bank to cut rates
Reserve Bank governor Lesetja Kganyago said that the Bank would not hold an emergency meeting and would wait till its scheduled meeting to take any decisions, according to a Bloomberg report.
But the spread of the virus meant the rand remains vulnerable to changes in global risks, noted Lings.
The current account data came out as a gauge of business confidence showed that sentiment among firms continues to hover at depressed levels.
Sentiment among business as measured by the SA Chamber of Commerce and Industry (Sacci) business confidence index (BCI) rose marginally in February to 92.7. The monthly reading, however, hovers just 0.1 index points above the average for 2019, which was the BCI’s lowest annual level since the survey began more than three decades ago. On an annual basis, the BCI was down from 93.4, driven predominantly by lower merchandise import volumes, the depreciation of the rand, and manufacturing output.
According to Sacci, businesses are “battling the odds of a tight financial environment and subdued economy”, it said in a statement.