South Africa’s rand is proving to be a double-edged sword for the nation’s current-account deficit.
While the currency’s slump to a 13-year low this month against the dollar should be benefiting exports, that’s being offset by rising import costs at a time when electricity utility Eskom Holdings SOC Ltd. is buying more diesel to run emergency gas turbines because of a power shortage. The weaker rand has pushed inflation to the highest this year and fueled a sell-off in bonds. An index of South Africa’s local-currency debt lost 3 percent for dollar investors this quarter, compared with average gains of 0.4 percent among 31 emerging markets tracked by Bloomberg.
The rand’s drop probably didn’t boost exports enough to narrow the deficit on the current account, the widest measure of trade in goods and services, in the first quarter. A central bank report on Tuesday will show the shortfall unchanged at 5.1 percent of gross domestic product, according to the median estimate of 15 economists surveyed by Bloomberg.
“With Eskom’s operation of diesel-powered stations, it definitely will push the oil import bill higher,” Isaac Matshego, an economist at Nedbank Group Ltd. in Johannesburg, said by phone on Friday. “The weaker rand is definitely putting pressure on the import bill.”
South Africa ran a 32.6 billion rand ($2.7 billion) shortfall on its trade account in the first three months of the year, compared with 27 billion rand in the same period last year, according to data from the South African Revenue Service. Eskom says it will need an additional 10.9 billion rand to import diesel in 2015 as it struggles to meet demand for electricity.
The utility is running diesel plants to augment power supply and limit blackouts. Eskom has increased rationing of electricity since November because of plant breakdowns and delays in bringing new facilities online. The power crisis in stifling factory production and curbing the ability of manufacturers to boost exports and take advantage of the weaker rand.
Finance Minister Nhlanhla Nene estimates the electricity shortage will limit economic growth to 2 percent this year, short of the 5 percent the government says the country needs to slash a 26 percent unemployment rate.
South Africa, and the rand, is also vulnerable to a reversal of the capital inflows that fund its current-account deficit as investors prepare for the U.S. Federal Reserve to increase interest rates this year. Foreign investors reduced purchases of South African bonds to 128 million rand last month, from 15.2 billion rand in April.
The yield on the benchmark rand bond due in December 2016 rose to 8.47 percent last week, the highest level in 14 months. The rand gained 0.5 percent to 12.1102 per dollar by 4:20 p.m. on Monday in Johannesburg, trimming the decline this year to 4.4 percent.
“Speculation surrounding the start of Fed policy tightening has sparked a sell-off across emerging-market assets, and sustained pressure on South Africa’s bonds,” Anisha Arora, an economist at London-based 4Cast Ltd., said by e-mail on June 18. “It is difficult to expect a narrowing of the current account balance when sentiment towards South Africa remains weak, given the persistent issues with power supply.”