Surprise trade surplus buoys the rand

IOL pic feb1 Rand 2857 BLOOMBERG The rand's rally also came in the wake of the Reserve Bank pushing up interest rates last week. File picture: Waldo Swiegers, Bloomberg

Johannesburg - South Africa’s rand firmed on Friday to trade below the psychological level of R16 to the dollar for the first time since January 7, as South Africa posted its biggest trade surplus in four years.

The rand gained 18c to R15.9928 per dollar by 5pm, breaching a barrier that traders say could help the currency firm further.

“It’s a combination of improved global risk sentiment, and the currency also received an additional boost from the 50 basis point interest rate increase yesterday,” said ETM Analytics economist Jana van Deventer.

The rand’s rally came in the wake of the SA Reserve Bank pushing up interest rates on Thursday in a bid to stem inflation after the rand fell by nearly 14 percent since December.

A shock decision by the Bank of Japan to cut interest rates sparked a rally in emerging markets.

December saw the biggest trade surplus as factories cut back on imports of machinery and equipment during the year-end holiday period.

The trade surplus widened to R8.2 billion from a revised R0.7bn in November, the SA Revenue Service said.

The consensus expectation was for a surplus of R4.9bn.

“December usually delivers a surplus largely driven by the seasonal slump in imports,” Carmen Nel, an economist at Rand Merchant Bank, said.

“Some of it relates to the slowdown in domestic demand, which should curtail imports, and also the lag impact of the lower oil price.”

Imports plunged by 13 percent to R80.6bn in the month, led by a 16 percent drop in machinery purchases and 35 percent decline in equipment components. Exports fell by 5.1 percent to R88.8bn, mainly due to a 28 percent plunge in vehicle shipments.

Short-lived

The improvement in the trade figures may be short-lived though. Reserve Bank governor Lesetja Kganyago said on Thursday that the deficit on the current account, the broadest measure of trade in goods and services, might widen as commodity prices fall and food imports climb because of drought.

The deficit widened to 4.1 percent of gross domestic product in the three months to September. “The financing of the deficit will also be more challenging in an environment of persistent capital outflows from emerging markets,” Kganyago said.

The monthly trade figures are often volatile, reflecting the timing of shipments of commodities such as oil and diamonds.

Kamilla Kaplan, an economist at Investec, said: “That exports grew 3.8 percent year on year despite the marked depreciation in the rand exchange highlights that deteriorating global demand dynamics served to limit the potential growth of exports.”

Credit demand rose at the fastest pace since 2009 in December, expanding to 10.3 percent from a year ago and compared with 9.4 percent in November. While there was marginal improvement in mortgage lending, borrowing by businesses contracted, reflecting weak growth.

The Reserve Bank’s latest hike may further put a brake on any recovery in credit demand.

Nedbank economists Dennis Dykes and Busisiwe Radebe said the stronger private sector credit extension numbers were unlikely to be sustained as interest rates were on an upward swing and economic activity was still expected to be subdued.

“In such a low growth environment, corporates are unlikely to borrow and consumers will find it difficult to increase their borrowing.”

The value of outstanding household mortgage balances increased to R864.6bn in the 12-month to the end of December, recording growth of 4.4 percent year on year, compared with growth of 2.3 percent at the end of 2014, said Jacques du Toit, a property analyst at Absa Home Loans.

“The higher lending rates will contribute to further financial strain for consumers, with the view that households’ credit balances, including mortgages, are to remain in single digits this year.”

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