Weak Q3 trade data keeps pressure on rand and fuels inflation fears

Expect further pressure on the rand next year. This was the forecast from economists on Friday after the Reserve Bank revealed a greater than expected widening of the current-account deficit in the third quarter.

Political uncertainty and economic factors abroad and at home, and the prospect of a sovereign credit rating downgrade this year, have been major drivers of the rand's volatility.

"The wide deficit is a key reason we expect that the rand will remain under pressure in 2017," said John Ashbourne, Africa economist at Capital Economics in London.

Pressure on the rand may stoke inflation - now at 6.4% - and lead to a rise in interest rates.

In recent months South Africa's weak economic growth has led the Reserve Bank to adopt a cautious stance and it has held back on hiking rates.

However, economists expect a hike of 25 basis points in the first half of next year, a decline in inflation from midyear, and as a result a possible cut in interest rates towards the end of the year.

The Reserve Bank, which published its quarterly bulletin on Friday, said the current-account deficit widened to 4.1% of GDP. Market expectations were for between 3.5% and 4%.

In value terms the deficit widened to R176-billion from R123-billion in the second quarter.

The value of imports contracted by 3.2% on weak domestic demand. But the value of exports dropped 7.2%, after increasing by 10.6% in the second quarter. The value of non-gold export goods fell during the third quarter, while export volumes contracted by 7.5%.

Stanlib chief economist Kevin Lings said that although the global economy was recovering, South Africa's exports would struggle to gain significant momentum.

He said improved electricity supply and labour market stability was important for the manufacturing and mining sectors.

Demand for imports would ease further given the slump in the local economy, Lings said.

Lower imports "coupled with some increase in exports could translate into a modest improvement in the trade and current-account deficit over the next year, which will hopefully ease some of the pressure on the rand", he said.

But political risk and a potential credit rating downgrade in six months could renew pressure.

Johan van den Heever, head of research at the Reserve Bank, said he expected imports to continue to outpace exports in 2017, which would widen the deficit.

But export earnings could be boosted by a rise in the prices of platinum and coal, which are related to the oil price, he said.

"One thing I don't see easily happening is our import quantities growing strongly in the next year or two," Van den Heever said.

"When the economy is slow and people are a bit subdued, then imports tend to be sluggish. I don't think we'll have runaway imports, at least not for a couple of years."

The Reserve Bank also said on Friday that the large deficit on the service, income and transfer accounts remained flat at R172-billion. An increase in net payments for services was offset by a decline in net income payments to foreign investors.

Ashbourne said: "The persistent deficit on these accounts is the key factor behind South Africa's large current-account deficit. Given the country's structural income account deficit, we expect that the overall shortfall will remain relatively wide."

He said this was a key reason the rand would remain under pressure next year and in 2018.