High Count for Current Account

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The central bank of South Africa just released the current account deficit figures for the fourth quarter of 2006, recording a rise to 7.8% of GDP. This brings the year's deficit to 6.4% of GDP, the highest yearly gap since 1981.

While the current account deficit rose from 5.2% in the third quarter of last year, both the central bank's governor, Tito Mboweni, and Finance Minister Trevor Manuel see some distinct positives amidst the gloomy numbers.

Noting the anticipated steep rise in the current account deficit in a statement published on the bank's website on March 20, Mboweni said the increase had been affected by a number of exceptional factors.

"In the fourth quarter of last year, we experienced a significant widening in the current account deficit, with the deficit on the trade account of the balance of payments having more than doubled from the third to the fourth quarter," Mboweni said.

The raw figures saw the trade deficit hit an all-time high of $1.74bn in October, easing to $1.4bn in November and a $41m surplus in the last month of the year.

Much of this increase was due to a sharp rise in oil imports, up by 140% during the quarter, a result of many of South Africa's refineries coming back on line after being shut down for maintenance and upgrades.

Mboweni urged the market not to read "inappropriate conclusions" into the headline deficit number, saying without the extra oil shipments the deficit would have been less than 6% of GDP.

"It is important to highlight that the related inventory build-up appears to be exceptional, and it is unlikely that oil imports will be maintained at these levels," he said.

Another factor in the trade gap was that while consumer spending has grown, so has the appetite for imported goods. However, Mboweni said the increased imports of capital goods would boost South Africa's productivity and assist the export industry in the future.

Export volumes rose by 9.5% due to higher demand for domestically produced mining products from China and India.

According to the finance minister, Manuel, a current account deficit of more than 5% of GDP is actually a sign of a strong economy.

"This is a sign of robust economic growth and other economies are similarly taking advantage of strong exchange rates to increase imported capital goods for domestic investment and capacity expansion," Manuel said in a speech delivered on March 19.

Economic growth over the medium and long-term will also increasingly reflect a better export performance on the back of more competitive manufacturing and services industries, he said.

The minister also cited the 2006-2007 budget surplus and the predicted surplus for 2007-2008 as factors that would act to moderate the effects of the current account deficit.

A treasury report issued mid-March predicts that the current account deficit will continue to run at between 5% and 6% over the medium term.

However, the accentuation of the positive by both Manuel and Mboweni wasn't helped by the January figure, which showed a deficit of $1.6bn.

The new figures are expected to put further pressure on the rand, which has slipped around 6% against the dollar so far this year. This comes on top of a 10% fall against the dollar and nearly 20% against the euro in 2006.

While this fall has added to the cost of South Africa's imports, again pressuring the trade deficit, it has also served to make the country's exports more attractive.

Mboweni has said the central bank's monetary policy committee will continue to monitor the effects of the current account deficit and the potential risk it poses to efforts to keep inflation down, but he also cautioned the markets not to read too much into a high fourth quarter figures.

"It is, however, important for the market to analyse the drivers of the current-account deficit, and understand the underlying trends and qualitative dimensions rather than to concentrate on what the mere figure as a percentage of GDP is and possibly draw inappropriate conclusions," he said.

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