Trade deficit likely to continue on its rocky path - economist

The SA trade deficit, which jumped to over R34 billion for the first two months of the year, has raised serious concerns. “As SA struggles to cope with a ballooning deficit on the current account, a sticky unemployment level of around 25%, and concomitant labour unrest, the spectre of a continuation in our low-growth mode raises serious concerns for taxpayers, consumers and businesses alike,” Luke Doig, senior economist at the Credit Guarantee Insurance Corporation, told FTW. Standard Bank economist, Shireen Darmalingam, expressed concern about the deficit’s effects on the rand exchange rate. When the figures for January were first released, for example – revealing that the deficit had ballooned to a record of R24.5bn after having narrowed significantly to R2.7bn in December – she expressed the market shock. “We had largely anticipated that the deficit would swell,” she said, “but were alarmed by the sheer size of it.” She noted that the rand had immediately weakened, and that such trade numbers put significant strain on the currency - “which,” she added, “is already weak.” When the February figures were released, Darmalingam heaved an economic sigh of relief – describing the deficit drop to R9.5bn, due to a 17% increase in exports and a 7.7% decline in imports, as “a notable contraction”. But she agreed with Doig on the likelihood of the deficit continuing on its rocky path. “While the direction of the latest print is positive (not least of which for the currency), we expect persistent trade deficits in 2013,” she said. “A weaker exchange rate this year may provide some support for exporters. However, uninspiring economic conditions across the developed world, as well as key emerging markets such as China, pose risks to this outlook. “Trade deficits will hinder the potential for rand appreciation, which in turn will impact negatively on inflation.” Doig noted that the trade deficit as a percentage of the gross domestic product (GDP) was also reaching worrying proportions. In 2011, it was -3.4%/GDP, and in 2012 had slipped down to reach -6.3%/ GDP – getting close to what the SA Reserve Bank (SARB) figures show is the record low of -7.50% in December of 1971. This leaves the worry that continuing deficits in 2013 may very well break that record. But the SARB takes a rather more bland attitude to these deficit/GDP figures. They provide an indication of the level of international competitiveness of a country, the bank said. “Usually, countries recording a strong current account surplus have an economy heavily dependent on export revenues, with high savings ratings but weak domestic demand. On the other hand, countries recording a current account deficit have strong imports, low saving rates and high personal consumption rates as a percentage of disposable incomes.”