South Africa's current account gap widens, raises likelihood of rate hike - CNBC Africa

South Africa's current account gap widens, raises likelihood of rate hike

Southern Africa

by Reuters 0

South Africa's current account gap widens, raises likelihood of rate hike. PHOTO: Pixabay

South Africa's current account deficit widened more than expected on Tuesday, pushing the currency lower while raising the likelihood of a second interest rate hike next week as the central bank fights to keep inflation in check.

A sharp fall in exports combined with a decreased inflow of foreign investment combined to stretch the current account shortfall to 5.1 percent of gross domestic product (GDP) in the fourth quarter of 2015, from a 4.3 percent gap in the third, the South African Reserve Bank said.

Economists surveyed by Reuters had expected a 4.35 percent gap for the fourth quarter.

The data highlights the economic strains on South Africa, where about a quarter of the population is unemployed and food prices are rising due to a drought, a combination that could hurt the ruling African National Congress' chances in the local government polls expected after May.

"The economy continues to have large external vulnerabilities. This will keep the rand under pressure," Capital Economics' senior emerging markets analyst, William Jackson, said in a note.

The rand extended early losses to more than 1 percent.

"The weakened export performance partly reflects the sluggish global economic environment, low commodity prices, and a lack competitiveness in South Africa’s manufacturing sector, despite the weaker rand," said investment bank Stanlib's chief economist, Kevin Lings.

Imports rose but only slightly, slowed by the weaker currency and a sluggish domestic economy. The bank sees GDP growth in 2016 at only 0.9 percent.

South Africa's trade balance deficit was also wider, swelling to 57 billion rand ($4 billion) from 22 billion rand shortfall previously.

The rand, down nearly 25 percent against the dollar in the last 12 months, wiped out any gains to be had by exporters, and will likely trigger higher consumer prices already amid the country's worst drought in decades.

"Though the depreciation in the exchange value of the rand boosted the export earnings of domestic producers, these benefits were more than fully offset by a further fall in international commodity prices," the bank said.

South Africa's manufacturing sector, which accounts for 13 percent of GDP, has seen growth flatline and its share of global exports shrink, and despite the weaker currency remains hamstrung by power shortages and rising wages.

When the central bank raised benchmark lending rates by 50 bps to 6.75 percent in January it cited the exchange rate and food price developments as significant threats to the inflation outlook and the upper limit of its target of 6 percent target for headline prices.