Current account deficit narrows broadly as expected in second quarter

South Africa’s current account deficit narrowed broadly, as expected, in the second quarter to R64.6 billion, equal to 0.9% of GDP from a revised shortfall of R160.9 billion during the preceding quarter.

A country’s current account represents its imports and exports of goods and services, payments made to foreign investors and transfers such as foreign aid, according to Investopedia. If it is positive (a surplus) that indicates it exports more it important. A negative (deficit) current account indicates that the country imports more than it exports.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outcome was slightly weaker than their forecast of -0.8% of gross domestic product (GDP). “We expected South Africa’s current account deficit to narrow somewhat in the second quarter due to easing supply-side constraints and lofty gold prices.”

The South African Reserve Bank announced earlier on Thursday that the trade surplus widened by 13.1%, while the overall deficit on the services, income, and current transfer account narrowed by 7.6% in the second quarter compared to the first quarter.

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Trade surplus widened

The trade surplus widened from R165.8 billion in the first quarter to R187.4 billion as the value of goods exports increased more than that of imports. Higher export receipts were attributed to favourable prices, while the increase in imports of goods and services was due to both higher volumes and prices.

Meanwhile, the shortfall on the services, income and current transfer account narrowed from R272.7 billion during the previous quarter to R252.1 billion in the second quarter. Van der Linde says the smaller shortfall stemmed from a narrower deficit on the primary income account, while the shortfalls on the services and secondary income accounts (current transfers) widened.

“However, the overall deficit on the services, income and current transfer account as a proportion of GDP narrowed from 3.8% in the first quarter to 3.4% in the second quarter.

The wider merchandise trade surplus was partly offset by larger deficits on the services and current transfers accounts as this graph shows:

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Nine consecutive quarters of current account deficit

Van der Linde says South Africa has recorded a deficit on its current account for nine consecutive quarters and it is likely to persist. “Services exports have yet to return to pre-pandemic levels, with the services account remaining in deficit territory since the pandemic.

“Supply-side constraints continued to restrict exports, albeit less than in the preceding two quarters, while recovering demand is reflected in higher import volumes. Meanwhile, the marginal lift in quarterly merchandise exports was mostly due to favourable metals prices (specifically gold), as opposed to higher export volumes.”

He points out that South Africa’s industrial sector has not been able to meaningfully boost output in recent years and market players have increasingly relied on favourable price dynamics. “There is heightened optimism that more private-public partnerships could alleviate supply-side constraints and help boost export capacity. Stimulating demand by unlocking new export destinations or galvanising existing ones could lift exports further.”

Income payments recorded the biggest quarterly percentage contraction, while transfer payments grew the most as this table shows:

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No turnaround in global and domestic economic conditions

Liandra da Silva and Nicky Weimar, economists at the Nedbank Group Economic Unit, say the significant recovery in the current account is welcomed but does not suggest a turnaround in global and domestic economic conditions.

“Inflation has continued to ease across the world, but interest rates largely remain elevated, with only a few key economies having cut and by a small margin. Demand conditions should begin to recover more convincingly and sustainably towards the end of 2024 as declining inflation and interest rate cuts bolster overall trade.”

However, they say, exports will likely continue to outweigh imports as muted growth and fixed investment activity weigh on domestic demand. “We expect the trade account to remain in a surplus, albeit softer, for the remainder of the year.

“The non-trade deficit should improve slightly during the year as income payments remain contained by muted domestic growth and declining investment, while income receipts will also ease, but at a softer pace.”

They also expect services receipts to increase modestly on the ongoing recovery in global travel but say it will be marginally offset by possibly weaker demand. “For the year, we expect a slightly smaller current account deficit of 1.2% of GDP from 1.6% in 2023.”