Current account deficit narrowed in third quarter, but…

While the current account deficit narrowed in the third quarter, there is not much to cheer about, with the latest balance of payments data reflecting the sixth consecutive current account deficit. South Africa registered a narrower current account deficit of R19.3 billion, equal to 0.3% of GDP.

The wider trade surplus of R189.1 billion was counterbalanced by a R208.5 billion shortfall on the services, income and current transfers account. South Africa’s current account deficit narrowed to R19.3 billion in the third quarter from a revised shortfall of R185.2 billion (previously -R160.7 billion) during the preceding quarter.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outturn was in line with expectations for a narrower deficit in the third quarter and better than the consensus forecast of a R111.2 billion current account shortfall.

The wider trade surplus from R22.2 billion in the second quarter to R189.1 billion, as the value of merchandise imports declined more than that of goods exports, signalled softer domestic demand. Meanwhile, the country’s terms of trade (including gold) deteriorated in the third quarter 2.4% compared to the second quarter as the rand price of imported goods and services increased while that of exports declined.

The shortfall on the services, income and current transfers account widened slightly to reach R208.5 billion in the third quarter from R207.4 billion in the second quarter. Van der Linde says the marginally wider shortfall stemmed from larger deficits on the services account and the primary income account, while the deficit on the secondary income account narrowed.

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Current account deficit will continue

The overall deficit on the services, income and current transfers account as a proportion of GDP remained unchanged at 3.0% on a quarterly basis.

Oxford Economics Africa forecasts that South Africa will register a consecutive current account deficit in 2023.

Van der Linde says commodity price tailwinds have faded and external conditions are much less favourable than they were in 2021 when the country recorded a current account surplus of 3.7% of GDP.

“Softer macroeconomic fundamentals mean the rand will remain vulnerable to depreciatory pressures in the near term. The domestic economy will likely be more dependent on foreign funding at a time of heightened geopolitical uncertainty, which further exposes the country to exogenous shocks and financing risk.”

An uncertain global economic environment, tight financial conditions and a considerably weakened domestic growth outlook, together with elevated government debt levels ultimately lift risk perceptions of South Africa, which has seen investors demanding higher compensation for holding local government debt, he says.

“Meanwhile, ongoing constraints in logistics infrastructure, besides load shedding, affect negatively on industry, a salient contributor to merchandise exports as well as fiscal revenue, while fixed investment intended to expand existing production capacity is undermined by weak demand and policy uncertainty.”

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Improvement will likely be short-lived

The economists at the Nedbank Group Economic Unit say the improvement in the current account in the third quarter will likely be short-lived, given unfavourable domestic and global economic conditions.

“Trade performance has been quite volatile during the year and the latest indications are that it deteriorated in the fourth quarter. Globally, the pass-through of tighter global monetary policy and lower commodity prices suppressed demand. Locally, export volumes have been contained by the ongoing energy crisis and the worsening port and rail inefficiencies.”

They say the upturn in gold prices in recent weeks will boost net gold exports, but the still-depressed volumes will limit the upside.

“The primary income deficit could narrow as bleak corporate earnings prospects weigh on dividend payments. On the upside, services receipts should edge higher as the festive season and a broadly weaker rand attract more international travellers.”