Mboweni hints at rates hike
By Gordon Bell
South Africa's deficit on the current account widened to its worst level since 1982, data showed yesterday, knocking the rand to a 21/2-year low and suggesting that interest rates will have to rise again.
Mboweni said he was "concerned" about the shortfall on the country's broadest measure of trade, which swelled to 6.4 % of gross domestic product (GDP) in the first quarter from 4.5% in the previous quarter.
Strong domestic demand, robust credit growth and high oil prices all conspired to boost imports and push the current account deficit to a record R103.1 billion in the first quarter, the bank's June quarterly bulletin showed. That news knocked the rand 3.5% lower to 7.41/dollar - its weakest level since January 16, 2004.
Its rapid descent backed perceptions inflation would climb, forcing the central bank to raise interest rates again after its surprise decision to hike its key repo rate by half a percentage point to 7.50% on June 8.
"There may be some major inflationary consequences down the road and strong import demand may also have some unintended consequences for domestic production," Mboweni told parliament's finance committee.
"Which means that something is wrong in the economy encouraging all this conspicuous consumption that is taking place ... and that thing that might be wrong is that money is too cheap."
Bank shares tumbled more than 3% while some retailers dived by 3.6%. Government bonds also took a beating, with yields on the most traded R153 bond due 2010 climbing by 14 basis points to 8.23%.
"My feeling is that more interest rate hikes are on the cards, the central bank has no choice ... the trend is in place, further rand weakness lies ahead," Brait economist Colen Garrow said.
Concerns over the ballooning current account gap had already piled pressure on the rand during a rout of emerging market currencies over the past month, which knocked the unit about 15% weaker in the year so far.
To date the deficit has been amply covered by inflows on the financial account, but a drop in foreign buying of domestic equities over the past month has fuelled concern there will be less support from that area.
During the first quarter of 2006 capital inflows - particularly portfolio investments into domestic equities - continued to finance the current account shortfall, the central bank's bulletin showed.
But other data highlighted South Africa's deteriorating export performance, which has been blamed on sustained strength in the rand currency after its descent to a record low of 13.85/dollar in December 2001.
In volume terms exports fell by 5% in the first quarter of 2006, while imports rose by 3.5%, matching an "accelerated pace" in domestic spending.
"We still see significant inflows into the economy which finance the current account deficit," Mboweni said.
"(But) I'm still concerned (about) a current account deficit of more than 6% of GDP ... There is an imbalance here."
Mboweni highlighted high levels of household debt, which jumped to a record 68% of disposable income in the first quarter of 2006 from 65.5% in the fourth quarter.
Economists said the trade backdrop and current account deficit was likely to improve as the weaker rand boosts the competitiveness of domestic exports.
"This could translate into a need for further monetary
policy tightening in the near term," Absa economist Monale Ratsoma said.
"However the recent depreciation in the rand could support exports and result in an improvement in the trade balance."