South African recovery hopes rise, repo rate cut hopes dim

PRETORIA – South Africa’s current account deficit narrowed to a 4-1/2 year low in the last quarter of 2009 while household spending and employment rose, adding to signs the economy is on the mend.

The data, released on Tuesday, probably reduces lingering chances of an interest rate cut today, although the recovery is still fragile.Africa’s biggest economy pulled out of recession in the third quarter of last year, but growth has been primarily driven by production, with consumers still under strain.Now households seem to be spending more in response to interest rate cuts made between December 2008 and last August.The Reserve Bank said in its latest quarterly bulletin that the deficit on the current account – long a drag on the currency and wider economy – shrank to 2,8 per cent of gross domestic product (GDP), the smallest shortfall since early 2005, from 3,1 per cent. Economists had predicted a 3,6 per cent gap.While imports declined last year due to the recession, the lower deficit was partly driven by a better export performance thanks to the upturn in markets such as the United States.The 4,0 per cent of GDP deficit for 2009 was the narrowest since 2005, and was well off 2008’s 7,1 per cent gap. It was easily financed by inflows, mostly portfolio investment.The trade account recorded a R24,9 billion surplus, and lower dividend payments to foreigners helped trim the shortfall on the services and income account.’While [the smaller current account deficit] still to a large extent reflects lack of import demand because of the lack of strong domestic demand growth … what is encouraging is that the global rebound is having a positive impact [on exports],’ Rand Merchant Bank economist Carmen Nel said.However, most analysts warned that the current account could come under pressure again later this year as the turnaround in domestic spending takes hold and demand for imports rises.Government bonds firmed after the data was released, with yields falling, while the rand briefly strengthened.For the first time since early 2008, domestic spending increased on an annualised basis from the previous quarter, rising 1,4 percent, with the growth led by purchases such as cars, computers and televisions.Formal employment, pummelled during last year’s slump, also picked up. Stats SA data showed non-farm employment rose 0,2 per cent – 18 000 jobs – compared with the third quarter.The latest signs of growth may dim the already small chance of an interest rate cut later this week, especially with higher fuel and electricity costs a threat to the inflation outlook.Nineteen of 22 economists polled by Reuters last week saw the Reserve Bank leaving the repo rate at the current seven per cent. But with the central bank having more leeway to take growth into account in its interest rate decisions, it may still opt for a reduction to help accelerate the recovery.’The recovery that we are seeing is very patchy, very uneven,’ said Colen Garrow, economist at financial service group Brait and one of the few holding out for a cut today.A firmer rand – it strengthened 22,3 per cent against a basket of major currencies last year – has helped contain inflation but has also raised concerns about export competitiveness. – Nampa-Reuters

In an age of information overload, Sunrise is The Namibian’s morning briefing, delivered at 6h00 from Monday to Friday. It offers a curated rundown of the most important stories from the past 24 hours – occasionally with a light, witty touch. It’s an essential way to stay informed. Subscribe and join our newsletter community.

The Namibian uses AI tools to assist with improved quality, accuracy and efficiency, while maintaining editorial oversight and journalistic integrity.