Selling South Africa, Inc.
By: Barry Sergeant
Posted: '31-MAR-05 15:00' GMT © Mineweb 1997-2004
JOHANNESBURG (Mineweb.com) -- The news is out: South Africa’s current-account deficit exploded by 135%, from R18.9 billion for 2003 as a whole, to R44.4 billion for 2004. The single biggest item within the current-account, the trade account, collapsed from a surplus of R26,6 billion in 2003 to just above zero in 2004.
Seen another way, the current-account deficit measured an increase of 113%, as it rose from 1,5% of gross domestic product (GDP) in 2003 to 3.2% in 2004. The explosion was driven by a rand bull market - particularly against the dollar - of 36 months’ duration. The process has steadily cut the cost of imports, driving inflation to historic lows, pushing interest rates to the lowest levels in 24 years, and generating, of course, a consumer boom of note.
The problem is that current-account deficits must be financed, and with foreign capital, on which front, domestic officials have so far steadfastly insisted, there have been no real challenges. The reality is that South Africa has one of the highest real interest rates in the world, attracting “hot” money from global capital portfolio flows into domestic overnight accounts.
Such transactions, known as “carry trades” can dry up in hours, never mind days or weeks. Despite similar, low rates of inflation in South Africa and the US, core interest rates are, respectively, 7.5%, against 2.75% in the US, where rates are rising. So far, it has been a no-brainer to borrow in dollars and invest in rands.
But it may be no coincidence that the heaviest bloodletting in global stock markets during March 2005 was seen not only in global emerging markets (GEMs), but specifically in those GEMs with worrying, and rising, current-account deficits. The majority of the effected stock markets are located in the axis that links emerging Europe, Middle East and Africa (EMEA).
Measured in dollar terms, stock markets in Turkey have fallen 19% this month, the steepest fall of any bourse in the world, followed, in order, by Hungary, Poland, South Africa (-12%) and the Czech Republic. Asian markets, which are underpinned by current-account surpluses, sometimes-massive ones, fell by lesser amounts.
Certain current-account deficits have made for big news in the past few years. But where South Africa’s latest alarming figures have been all but ignored by investors, there has been no question that the US current-account deficit is the world’s most watched figure. In its publication World Economic Situation and Prospects 2005, the UN stated that the US current-account deficit, which last year rose 25% on 2003’s figure to a record high of $666 billion, was simply the largest external imbalance in the world. The UN warned over the persisting possibility of “an abrupt and globally damaging correction.”
However, the attitude towards South Africa’s current-account deficit may at last be changing. Monde Mnyande, head of research at the Reserve Bank, South Africa’s central bank, this week stated that the current-account deficit “is something to worry about.”
In a note to clients, back in January, Citadel Investment Services, noting that South Africa’s international trade balance had swung from a sizeable surplus to a gaping deficit, argued that “if the pace at which this trade balance has deteriorated were to continue, South Africa would be in a similar position to that of the US in a matter of six to nine months.”
March’s bloodletting in global market set in on March 22, when the Federal Reserve, the US central bank, raised core interest rates for the seventh consecutive time, and hinted that it may accelerate its programme of further hikes, given signs of rising inflation, not least inspired by record dollar crude oil prices.
That triggered a global switch out of GEM equities and bonds, into dollar assets. However, it is now equally clear that not one of the 24 developed country stock markets is going to end March with a net gain.
The bottom line is that global financial risks are on the rise. Previous periods of Federal Reserve monetary tightening have typically culminated in a financial crisis, not least devaluation of the Mexican peso in 1994, and the Asian currency crisis in 1997-8, to mention just two examples.
Back to the present tense, where South Africa’s current-account deficit continues to balloon. As Shireen Darmalingam, an economist at Standard Bank puts its, “the rand’s relative strength has thus far dampened exporting companies' profits and has hurt trade competitiveness. This could cause the trade deficit to widen in the months ahead. Domestic demand, however, is likely to continue supporting imports in the coming months.”
