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World Bank Says South Africa Vulnerable to Fed Tapering

Oct. 7 (Bloomberg) -- 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 15 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.

Volatile Flows

“Fiscal deficits have been high, making the country vulnerable to volatile capital flows” which has implications for the exchange rate, Punam Chuhan-Pole, lead economist of the World Bank’s Africa region and author of Africa’s Pulse, told reporters on a conference call from Washington. “Diversifying the sources of financing is one way to limit the impact of volatile flows on the balance of payments and in turn exchange rate pressures.”

South Africa’s budget deficit reached 5.1 percent of GDP in fiscal year through March 2013, according to National Treasury estimates.

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 last year to help revive growth. Strikes in the mining and manufacturing industries and sluggish demand from Europe and Asia will probably constrain growth to 2 percent this year, according to Reserve bank Governor Gill Marcus.

Support Growth

“There are a host of issues in South Africa -- very high unemployment, wages that don’t seem commensurate with the level of high unemployment, lots of rigidities in the labor market as well as high inequity,” Chuhan-Pole said. “Difficulties in industrial relations are likely to impact foreign direct investment. Macro-economic management, especially monetary policy, has been supportive of growth, but these structural issues, the labor market as well as the barriers to entry, need to be addressed.”

The World Bank forecasts average economic growth in sub-Saharan Africa will accelerate to 4.9 percent this year from 4.2 percent, climbing 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 of 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, it said.

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 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,” Chuhan-Pole said in an 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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