“The danger of such a big current account deficit comes through volatility in your currency which translates into unstable price environments in the country. It is negative for growth and adds inflationary pressure,” said market analyst at Econometrix George Glynos, Wednesday.
Following Finance Minister Trevor Manuel's Budget Speech 2008 on Wednesday in which he told Parliament that one of South Africa's greatest economic vulnerabilities is the widening gap between what the country imports and exports.
“One of the points of vulnerability in our economy is that we import far more than we export – this gap, called the current account deficit, has widened to an estimated R143 billion a year.
“Part of this is because we are investing heavily in infrastructure expansion, we are importing machinery and capital goods, in addition to the imports of fuel and other goods. The value of our exports, although boosted by high commodity prices, is insufficient to pay for our exports,” said Manuel.
The minister highlighted that challenges facing the country in terms of increasing exports include skills shortages, transport capacity constraints, high telecommunication costs and tariffs that raise the price of intermediate and capital goods.
Manuel's budget mentioned that South Africa's inflation – which has consecutively breached the Reserve Bank's 3 - 6% target band eight times – will drop significantly to an average of 4.9% in 2009.
Not, however, sharing the Finance Minister's sentiment, Glynos said: “Given the current weakening currency, forecasts for the current account deficit, the soaring oil price and global slowdown, it's going to be a struggle to get it down [from the current 7.1%].”
Questioned on a prediction for the next meeting of the Monetary Policy Committee (MPC) in April, the market analyst said the Rand will most likely be the most significant factor in the next decision.
“The Rand holds the key to the question of whether the Reserve Bank will reverse its decision to keep lending rates stable. But as it stands at the moment, things are not looking pretty,” said the market analyst.
Providing some respite to South Africans, the MPC decided to leave the repo rate unchanged at 11% at the end of January 2008. The lending rate of commercial banks to customers – referred to as prime - therefore remained at 14.5%.
Commenting on Manuel's change to the country's tax structure, tax specialist Dr Robin Beale at PKF Chartered Accountants and Business Advisors said the changes bode well for small and entrepreneurial businesses.
“The simpler tax matters are for small business, the better.
“The new turnover-based tax proposed for these businesses will be a combination of Value Added Tax (VAT) and income tax, with business owners paying tax on their total turnover without making any deductions for expenses.
“However, there is a danger that small, unsophisticated businesses could unwittingly miscalculate their taxes, therefore a simpler turnover system is preferable,” said Dr Beale.
Dr Beale said Manuel has come up with a positive set of proposals for business, in particular small and entrepreneurial business, and that it is good news for the South African economy.
Article published courtesy of BuaNews
