KEVIN Lings is chief economist at Stanlib.
SUMMIT TV: "Shocking" is the description applied to South Africa’s trade data in 2012 — the October figures blew most analysts’ expectations out the water with a R21bn trade deficit. What was so shocking about this for you?
KEVIN LINGS: For me the shock is that imports were that robust — in other words, the cause of the deficit. Remember this is a record deficit and largely due to imports. When I looked at it, imports were fairly broad, but in particular machinery and equipment, which also includes things like hi-fis, televisions and appliances where those would be stocked up before the Christmas period.
STV: Machinery and equipment imports would almost imply that there is investment into the South African economy — but you’re saying the consumer demand we’ve seen in the past few years is evident in these numbers?
KL: That’s right. Ordinarily we would be encouraged by that number because it can reflect investment in South Africa but if we look at the investment data that doesn’t really support an unfolding investment cycle. Investment has picked up but it’s not that robust. This is more likely to do with consumerism — in other words what we’ve seen driving South Africa’s recovery is consumer spending, and obviously as we go into the Christmas period the retailers tend to stock up significantly and that’s mostly in October because a lot of the Christmas spending happens in November and the first couple of weeks into December so you need the stock on hand from the end of October. A lot of the imports relate to that build-up of stock for the Christmas season and in that sense it’s just consumerism partly funded by salaries and wages but also increasingly funded by credit — so this is not necessarily a good-news story in the sense that historically sometimes South Africa has run a "good news trade deficit" because it’s investment and machinery and equipment for that investment. It doesn’t have that characteristic at the moment…
STV: Presumably not good news: the tepid level of exports at the moment?
KL: That’s right. Exports are struggling — one can understand why because Europe is in recession and that’s historically been our big trade partner. Exports there year to date are negative and now our exports to Asia are also under pressure so that’s two key areas. On top of that we’ve seen the disruption in the gold and platinum mines so exports are not compensating for the imports side.
STV: You said you were stunned by the drop in precious metals exports in that it wasn’t as low as you thought it might be…
KL: That’s right. We saw a small fall-off in September in the last month’s data in terms of precious metals exports and I thought we would see a much bigger effect in the October reading — as it turned out there was a decline in precious metals exports, but only R1.9bn. Now that sounds like a lot and it is a lot — but the magnitude of the disruption in the gold and platinum sector would suggest this decline can easily be around R8bn so this tells me we haven’t seen the full effect of the disruption from the gold and platinum sector and we could still see worse data in the months ahead. Before I opened the data release I thought this was all due to platinum but that’s not the case as it’s largely due to a massive increase in imports.
STV: That’s really worrying if it’s going to be worse. Year to date the accumulative trade deficit reached almost R105bn where last year we recorded a surplus of R9bn so there’s been a reversal.
KL: There has been a massive change in our trade experience. Obviously what happened is we were in recession and when South Africa is in recession typically we don’t import much so in that sense we put ourselves in a healthier situation. We were running trade surpluses not that long ago but now we are into the worst trade deficit ever and what is worrying me is the level of imports is the biggest South Africa has ever seen. So imports year to date are up around 18% but obviously the economy is not growing at 18% so that’s telling us South Africa has become more imports-intensive and a bigger portion of spending is going on imports, and what is losing out is the manufacturing base.
STV: Why is that a bad thing?
KL: The reason is that as you grow the economy, let’s say at around 2.5%, you want as much of the spending to benefit South Africa directly and particularly in terms of employment. What we are doing is driving the economy forward through consumer spending but a lot of that is benefiting our trade partners — so they are seeing a pickup in industrial production and employment and we are missing out on that. Meantime our manufacturing sector is under enormous pressure and losing jobs. We can’t afford that so if we could find a way to channel some of that consumption into local production … or if we could find a way to manufacture more exports, that would be beneficial. But we are not at that point.
STV: There were expectations this kind of number would send the rand into the stratosphere — the rand weakened a little on the day but not overly much. There is fear that this could set us up for a much weaker rand in future…
KL: What we would say is that the rand is "at risk of weakening" but that doesn’t mean it will weaken. It has already come under some pressure and when you’re running this type of trade deficit, and therefore a bigger and bigger current account deficit, you have to fund that. We have been funding this through foreign investment — mostly portfolio flows into our bond market and equity market — so as a result of that the rand has not depreciated as much as it could have. This is telling us that we have been able to attract foreign investment in significant quantities but the more the trade numbers deteriorate and the more the current account deteriorates, the bigger the risk gets that we can’t fund this and get enough foreign investment to pay for these imports and at that point the currency would weaken. It’s not that we are saying it’s a given the rand will weaken — that’s not a foregone conclusion — it’s simply saying that the rand is increasingly at risk of weakening.
STV: The interesting thing is the JSE went to an all-time high — was there any correlation?
KL: If we look at the stock market there are benefits in that it would suggest the consumer is still reasonably healthy. But equally if you put the rand at risk there’s a number of stocks that do benefit from a weaker rand so it’s not that one reads this as being all negative. There are some investment opportunities that would flow from this type of number — but net net it is telling us that the economy is out of balance and we are not growing the economy in ways we want to, relying too much on consumer spending and satisfying that with imports.