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Standard Bank Group
The SA Daily 15 April 2019

CAD should be fundable

  • In 2018, gross fixed capital formation (GFCF) declined 1.4% y/y. In 2017, average growth was 1.1% y/y. The 2018 GFCF decline came as public sector (general government and public corporations) GFCF declined, with general government GFCF falling 4.4% y/y and public corporations GFCF 12.4% y/y. Nevertheless, private business enterprises GFCF grew 2.1% y/y in 2018, and 2017 too had posted some robust growth, of 5.0%.
  • The chart below demonstrates that, usually, robust GFCF growth is accompanied by a wider current account deficit (CAD). Thus, partly based on our outlook for a delayed GFCF growth, we are more bullish than the 3.5% consensus, expecting the CAD to narrow to 3.2% of GDP this year, from 3.6% in 2018.
  • So, at 3.2% of GDP, the CAD should be fundable by foreign capital inflows. Fundamentally, the rand then should firm to R13.40/$ by year-end; this too is more bullish than the consensus forecast of R14.25/$.
  • Still, a CAD narrowing due to subdued GFCF growth would not necessarily be positive because it implies negative employment growth prospects. Government therefore simply must implement the requisite structural reforms to promote both producer and exporter competitiveness, thereby ensuring robust GFCF growth.

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