Current account deficit widens during Q1 (Although trade balance is in surplus)
The current account balance serves as a measurement of inflows and outflows of goods, services and investment returns. It is a vital indicator of a country’s ability to meet external obligations. Key indicators include the trade balance (exports-imports) highlighting a country’s export orientation, as well as the income and services received and paid out on investments.
On June 20th 2017, the South African Reserve Bank (SARB) reported the current account deficit widened from 1.7% of GDP in 2016/Q4 to 2.1% of GDP in 2017/Q1. In preceding quarters, the deficit had shown a steady decline, similar to other emerging markets due to increased portfolio inflows from foreign investors.
Despite a strong trend of portfolio inflows in emerging markets, the recent increase in the deficit is primarily attributed to a widening of the shortfall on the net income and service account. This account indicates money leaving and entering the economy from salaries, portfolio investments, business services and tourism. Essentially, the shortfall on the net income and service account shows that South Africa is paying out more income to foreign investors than it is receiving from offshore investments. Furthermore, the South African economy imports more services that it exports. Net dividend payments to offshore investors rose by 5% between 2016/Q4 and 2017/Q1.
Trade surplus positive on the back of weak import demand growth
The trade surplus shrank by R1 billion between 2016/Q4 and 2017/Q1. This was due to a notable 11.4% q-o-q increase of net gold exports and only a slight 0.2% q-o-q increase in domestic demand for imports. The soft increase in import demand was due to increased mining and agricultural products import prices, as well as a substantial decline in local manufactured goods and local demand for machinery and electrical equipment. The increase of gold exports was a result of a 5% q-o-q increase of the rand gold price due to an appreciated exchange rate during 2017/Q1. This signalled an opportunity for the SARB to increase external gold sales and as such improve the trade surplus.
Sovereign downgrades influence outlook for current account
Recent sovereign rating downgrades are likely to influence South Africa’s dependency on foreign portfolio inflows to finance its current account deficit. If more downgrades occur, there is an increased likelihood of forced selling of South African bonds, since certain investment funds are prohibited from investing in non-investment bonds as a result of the bond’s probability of default. A reversal of investment into bonds and equities would further widen the current account deficit. The SARB would require utilising various policy to negate any impacts felt by the reversal of investments, such as raising interest rates and devaluing the rand. The policies would curb local demand of imports and improve the competitiveness of South African exports respectively, resulting in a larger trade surplus and a potentially narrowed current account deficit.
For more information:
KPMG in South Africa
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