SA’s economic problems were laid bare on Tuesday in data showing that the current account deficit had widened sharply in the fourth quarter of last year, due to higher imports, and as slower global demand damped exports.
The rand dived on the news, and if it continues to fall, it will add to the challenges faced by the Reserve Bank’s monetary policy committee next week.
The current account deficit rose to 5.1% of gross domestic product (GDP) in the fourth quarter from 4.3% in the third quarter, causing the rand to depreciate to R15.44/$ from R15.26/$ earlier in the day.
A weak rand is of concern to the central bank as it stokes inflation, forcing the Bank to raise interest rates despite slowing economic growth.
The worse-than-expected data and above-target inflation, supported forecasts for substantial interest rate hikes this year, Capital Economics senior emerging markets economist William Jackson said.
Credible policy actions and certainty would be "of utmost importance" in the next few months to help the rand maintain the relative "stability" it had enjoyed in recent weeks, BNP Paribas Securities economist Jeff Schultz said.
A deficit on the current account means SA is importing more than it exports and paying more in dividends than it receives, which puts the country at the mercy of foreign investors to finance the shortfall.
Overall, last year, the current account deficit narrowed to 4.4% of GDP, or R174bn, from 5.4%, or R207bn, in 2014.
The current account shortfall was driven mainly by a widening in the trade deficit to R57bn from R22bn in the third quarter, the Bank’s quarterly bulletin shows.
The data bring SA’s challenges to the fore: the softer rand is not supporting exports as much as anticipated due to poor global demand; imports (mainly of manufactured goods and oil) remained strong despite a weak rand; and dividend payments to global companies continued to outstrip receipts.
Although the fragile rand boosted the export earnings of domestic producers, the benefits thereof were "more than fully negated" by a decline in the prices of commodities that SA exports. The price in rands of exports, excluding gold, fell 0.4% while the dollar price of nongold commodities dropped 7.7%.
Lower demand, particularly from China, for commodities such as copper and nickel, and a global oversupply of iron ore have dragged down prices.
Stanlib chief economist Kevin Lings said in looking ahead slightly higher commodity prices this month coupled with a lower rand should help to boost export earnings.
The only comfort is that SA continued to attract enough capital inflows to finance the current account shortfall.
In the fourth quarter R53.5bn flowed in compared with R41.7bn in the third quarter.
Investors were unlikely to favour the financing of the current account by the "other investment" category Mr Schultz said. Such capital flows were unsustainable and could leave the country anytime, causing rand weakness. The rampant increase in outflows, a choppy outlook on portfolio investments and strategic reviews of South African operations by Barclays and Old Mutual suggested a high degree of caution by investors.
Inward foreign direct investment fell markedly to R22.6bn last year from R62.6bn in 2014, while outward foreign direct investment fell to R68.3bn from R83.2bn. Capital inflows slowed to R142.3bn last year from R150.1bn in 2014 on both global and domestic challenges.
"Bouts of risk aversion" among international investors towards emerging markets, and uncertainty in financial markets relating to rate hikes in the US, declining commodity prices, and economic growth concerns in China, limited capital inflows.
"In SA, the inflow of capital was further affected by poor economic growth, a widening in the current account deficit … as well as credit rating agencies’ negative outlook for economic growth during the fourth quarter of 2015," the Bank said.
Inward foreign portfolio investment increased to R105.6bn from R73.3bn in the corresponding period.