The weaker rand should be supportive of a reduction in South Africa’s current account deficit over the medium-term, but Standard Bank chief economist Goolam Ballim warns that continued industrial unrest and ongoing electricity constraints remain key risks to realising the potential trade benefits of the more competitive exchange rate.
He also cautions that the current account deficit’s responsiveness to the fall in the rand would follow a “dastardly J-curve”, whereby the immediate impact of rising import costs will cause the deficit to worsen before it improves. The lag could be five or six months and could also be affected by seasonal impacts.
“But a 25% or so depreciation in the currency and the prevailing nominal level would seem to me to be remediating, provided the supply machinery functions – that we can build the cars and we can draw the platinum out.”
South Africa’s current account deficit rose to 6% of gross domestic product (GDP) in 2012 and the National Treasury expects the deficit to remain for some years yet. Standard Bank forecasts a modest narrowing to 5.7% in 2014 and expects the figure to decline to 4.5% of GDP next year.
But further delays to the introduction of new baseload electricity capacity remain a concern, Ballim cautions.
A similar point has been made by World Bank economist Catriona Purfield, who argues that, unless power constraints are addressed and logistics charges made more competitive, the full potential of the more competitive currency will not be realised.
South Africa is also importing intermediate and capital goods for its infrastructure projects, which “prevents an import response to a more depreciated exchange rate”, Purfield noted recently when releasing the bank’s fifth ‘South Africa Economic Update’.
“Each passing day, week and month our electricity capacity becomes more constrained by definition,” Ballim stresses, warning that further delays to the introduction of capacity from Eskom’s Medupi power station remain a real threat to growing energy-intensive exports.
However, production losses associated with industrial unrest are also of concern, particularly in light of South Africa’s already low growth outlook for 2014. Standard Bank expects the South African economy to grow by only 2.1% this year, while the International Monetary Fund has lowered its outlook to 2.8%.
Finance Minister Pravin Gordhan will provide his forecast during his February 26 Budget Speech, having already lowered the 2014 outlook to 3% from 3.5% in his October Medium-Term Budget Policy Statement.
South Africa did not have as many strikes in 2013 as was the case in 2012, but Ballim has calculated that the number of person days lost to strike activity was still about four times that experienced between 1994 and 2005.
“So for the last five years, there has been a steep rise in the number of man days lost to strikes,” he reports, highlighting that 12 of South Africa’s 14 significant sectors experienced strike-related disruptions last year.
The outlook for 2014 could be better, mainly owing to the fact that fewer wage negotiations are scheduled as a result of multiyear agreements. But the year has not started well, with the Chamber of Mines estimating that the platinum strike has been costing the industry R400-million a day.
There is also a risk of industrial disputes outside of “what the diary suggests”, in the event that real income gains are eroded by inflation.
Standard Bank is forecasting consumer price inflation to rise to 5.8% on aggregate in 2014, but Ballim says there will be sustained periods where the inflation rate hovers above the target band of 3% to 6%.
The bank, therefore, expects interest rate increases of 100 basis points, but also expects the rand to be “stronger by Christmas”, while trading between R10.75 to R11.75 to the US dollar over the coming six months.
“We think that electricity risks and industrial strikes probably stand as the most notable theme of risk in 2014. But the markets will also look for policy continuity coming out of the elections,” he adds, stressing that much attention will be given to government resolve around the implementation of the National Development Plan.
Any change to the portfolio of Finance Minister in the post-election Cabinet would be heavily “scrutinised”, with the markets likely to react favourably to the reappointment of Gordhan.
By: Terence Creamer
