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World Bank Says South Africa Remains Vulnerable to Fed Tapering

South Africa will be one of the most vulnerable economies in sub-Saharan Africa to capital outflows when the U.S. Federal Reserve starts tapering its monetary stimulus program, according to the World Bank.

“Although recent statements by the Fed indicate a continuation of its quantitative-easing measures, the inevitability of tapering and the subsequent rise in base interest rates and spreads still remain,” the Washington-based lender said today in its latest Africa’s Pulse report.

The rand has lost 16 percent of its value against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg, as speculation about when the Fed will start reducing its $85 billion-a-month stimulus program led investors to withdraw funds from emerging markets.

“South Africa, which has strong links with global financial markets, is particularly vulnerable to capital flow movements, since debt-creating flows finance around 80 percent of the current-account deficit,” according to the report.

South Africa relies on short-term portfolio inflows to help finance the shortfall on its current account, which widened to 6.5 percent of gross domestic product in the second quarter from 5.8 percent in the first three months of the year.

The central bank of South Africa, which has the continent’s largest economy and is the world’s sixth-biggest producer of gold, has left its key repurchase rate at 5 percent since July 2012 to help revive growth.

Faster Growth

The World Bank forecasts average economic growth in Sub-Saharan Africa to reach 4.9 percent this year from 4.2 percent in 2012, before accelerating to 5.3 percent next year and 5.5 percent in 2015.

Resource-rich economies in sub-Saharan Africa, particularly oil exporters, remain at risk to declines in commodity prices, the World Bank said. Many mineral-producing nations have made little progress in diversifying their economies and export performance has already been adversely affected by the drop in prices, according to the World Bank.

By value, exports from the region contracted 4.1 percent in the first half of 2013 from a year earlier, according to the World Bank’s commodity composite-price indexes. Agricultural goods declined 9.0 percent, metals and minerals dropped 8.8 percent and oil retreated 5.6 percent, it said.

“High dependence on one or a few commodities makes Africa’s resource-rich countries vulnerable to sharp movements in prices of these commodities,” Punam Chuhan-Pole, lead economist of the World Bank’s Africa region and author of Africa’s Pulse, said in a separate e-mailed statement.

To contact the reporter on this story: Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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