Emerging Markets

June 20, 2014

By: Darren Viegas

South Africa’s Current-Account Gap Narrows While Inflation Soars

Unexpected news out of South Africa as the current-account deficit unexpectedly narrowed and inflation rose for the previous three months ended. The gap on the current account shrank from 5.1% to 4.5% of GDP, and inflation rose to 6.6%. The Rand rallied 0.6% percent as yields fell 1% on the news. Consensus estimate was for the current-account deficit to widen to 6% of GDP. Export volumes rose 2.1% as shipments of manganese ore and ferrochrome offset the slowdown of platinum. Foreign Direct Investment doubled to 8 billion rand.

This is very unexpected news as it took most economists, and myself, by big surprise. While the reduction of the current account deficit is great news for the Rand as its volatility may be reduced, especially with the FOMC meeting coming up this afternoon. If this current account deficit account deficit lowers paired with an increase in FDI, we could see a much healthier rand that won’t be as volatile around Fed announcements. Inflation is a new threat looming on the horizon, as the 6.6% is already in the top band of the central bank’s target rate. If inflation keeps rising, monetary policy intervention might be necessary.

India To Sell 25% of Rice Stocks in Bid to Curb Inflation

India will be selling a quarter of its rice stockpiles and ease restriction on selling produce as a weak monsoon threatens to raise inflation to unsafe levels. Modi’s administration will sell 5 million tons of rice at subsidized rates, and fix minimum export prices to make sure that the goods will be available in a nation where 70% live on less than $2 a day. The central government has amassed 21 million tons of rice and 42 million tons of wheat- twice the recommended buffer stock, along with taking other contingency measures such as diesel subsidies to farmers and subsidies to buy seeds.

I believe that this is another action by the Modi administration that will move India towards economic growth. In a country with such a high poverty rate, a sudden spike in core food prices good leave many starving and potentially dying. Modi has once again taken steps to ensure India’s path to economic prosperity.

Rupiah Breaches 12,000 Level As Importers Seen Hoarding Dollars

The week hasn’t been all good news for the fragile five as the rupiah weakened past its 12,000 per USD. This has occurred as importers are hoarding dollars to meet future payments and a surge in oil prices from the Iraq conflict will worsen Indonesia’s trade balance. Oil and gas imports made up 23% of all shipments in April. Importers are buying dollars based on fears that the currency will slide further in the future.

This news is just as the FOMC plans its meeting this afternoon. The Rupiah may see some big volatility depending on what is announced. Going forth, it would be beneficial for Indonesia to reduce its current account deficit, and increase its FX reserves to appreciate the rupiah in times like these.

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