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    SA trade and capital accounts

    There are so many drivers of a currency relative to another that it is very difficult to predict an outcome over any shorter period of time.

    Included in some of the driving factors are the following

    • relative size of the economy to the rest of the world.
    • productivity and manufacturing production
    • global demand for a country’s goods, services and commodities.
    • necessity on imported goods and services.
    • political factors
    • government’s fiscal policy and its level of external government debt
    • relative attractiveness of interest rates and returns on investment assets
    • differential in inflation rates.
    • intervention by central banks

    These factors are always present, but from time to time, one or more of these factors dominate trading in the currency.

    In terms of a country’s external trading account with other countries, there are 2 main components - the current account and the financial account.

    The current account itself consists of 2 main components, firstly the trade balance, which is the differential in merchandise imports and exports. Added to this is the net payment for services, income and current transfers, in order to arrive at the balance on the current account.

    For many years now, South Africa has been running a current account deficit. A large component of this is the net services line.

    For the first 2 quarters of 2010, the trade numbers were positive, but these faltered in August where a trade deficit of R4,6bn was recorded.

    The chart below reflects the current account deficit as a function of the GDP, where it is clear that a large and steady net outflow is the net income payments.

    Source: SA Reserve Bank

    Funding of the shortfall

    The shortfall on the current account has been funded by inflows on the capital account or financial account.

    The composite numbers according to the Reserve Bank for the years 2005 to date are as follows:

    This aggregate number includes direct investment, portfolio investment and other. While 2008 recorded large portfolio outflows, these were negated by large direct investments.

    In many cases however it’s the net portfolio investments that have an immediate impact on the currency, while large direct investments can be neutralised by the Reserve Bank.

    Net foreign flows into SA Bond Market

    Source: Grindrod Bank

    It is very evident that the trade account deficit continues to be funded by the financial account, which largely comprises portfolio flows. Direct investment was recorded at R48,3 billion in 2009. For the first 2 quarters of 2010 there has been very little, but there are some larger deals in the pipeline, such as the foreign purchase of Didata and Massmart.

    Portfolio flows have been high, but for the last few weeks net investment into the bond market by foreigners has slowed.

    The net result of all of this is a rand trading at R6,91/dollar, R10,93/pound, R9,66/euro and R6,82/AUD.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-10-20, 17:08:22, by ian Email , Leave a comment
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