Looking deeper than the numbers in South Africa

South Africa’s current account deficit number came in at a deficit of 6.1% of GDP in the second quarter of 2006. Although it is contracting, as last quarter was 6.4%, the bigger picture is still bearish for the South African rand.

With a slowing growth environment, investors will generally put countries with current account deficits out-of-favor. In South Africa, data shows that foreign investment will most likely not be enough to cover the deficit by the end of the year. Additionality, with South Africa being the leading gold producer and having a currency tied to commodity prices, the downward pressure on commodities does not bode well for the rand.  The chart to the right shows the rand against the dollar over the last forty-five days.