Fixed investment, driven by public sector projects, has been the fastest-growing domestic expenditure sector in South Africa for four consecutive quarters, Absa Capital noted in its latest quarterly economic report, while forecasting continued fixed-investment expenditure growth of 5.6% in 2012 and 2013.
However, in the context of weak business confidence, falling private investment and modest economic growth, “imbalances are appearing”, most notably on the trade account.
Imports of machinery and mechanical equipment rose strongly in the second quarter and economist Ilke van Zyl said that, given the relative price inelasticity of government demand, imports were likely to continue. South Africa intended pursuing a portfolio of transport, power and water projects collectively valued at around R860-billion between 2012/13 and 2014/15, the bulk of which would be funded through debt and revenues earned by State-owned companies.
But in the meantime, the country’s export performance was weakening in light of recessionary conditions in a number of European markets, as well as slowing growth in China and other emerging markets.
“Therefore, we expect the current account deficit to remain wide over the coming quarters, and we have revised our current account deficit as a percentage of gross domestic product (GDP) forecast to 5.5%, from 5%,” Van Zyl added.
In its September quarterly bulletin, the South African Reserve Bank reported that the deficit on the trade account rose to R75.7-billion in the second quarter, from R42-billion in the first. It also reported a rise in the current account deficit to 6.4% of GDP, from 4.9% in the prior quarter.
“This implies the country is in a vulnerable position as far as financing is concerned given that the bulk of the deficit is financed by fixed income portfolio flows,” she said.
But macro and fixed income research head Jeff Gable said it was difficult to offer a specific level at which the current account deficit would become unsustainable to the point where infrastructure spending had to be reigned in.
“The practical answer is that the current account deficit becomes unsustainable when you can’t finance it. In some countries current account deficits of 1% or 2% of GDP aren't financeable. In South Africa, currently we find that a current account deficit, [which] in the second quarter was more than 6% of GDP, was more that financeable.”
But the ability of South Africa to continue to finance the deficit would depend materially on whether global investors continue to believe there is a return for their assets in South Africa.
“For policymakers, all you know is that the larger your need for global finance, the more exposed you are to a turn in sentiment. Therefore, [policymakers] feel more comfortable when the deficit is lower because the pain that can be levied on you when sentiment turns is less,” Gable elaborated.
Investors and the credit rating agencies were increasingly focused on the country’s social and political tensions, particularly in light of ongoing industrial relations strife. Absa Capital, therefore, argued that more assurances might need to be offered beyond the National Treasury’s continued assertion that South Africa’s policies remain “stable and predictable”.
The Budget deficit forecast in the upcoming Medium-Term Budget Policy Statement of October 24 would also be heavily scrutinised, as would the African National Congress’s elective conference, taking place in Mangaung, in December.
“There is an awful lot to play for in 2013. It’s a question of policy, it's a question of stability, it’s a question of trying to find the right answers for South Africa . . . [and for dealing with] the core issues of poverty, inequality and unemployment,” Gable warned.