SA’s strong exports surprisingly narrowed current account deficit

South Africa’s strong exports narrowed the country’s current account deficit in the first quarter of 2023, declining to a seasonally adjusted and annualised deficit of R66.2 billion or 1% of GDP. The narrowing surprised economists as it follows the steep deficit of R155 billion (2.3% of GDP) in the fourth quarter of 2022.

A current account deficit happens when a country spends more money abroad than it receives, while a trade deficit is the largest component of a current account deficit, which occurs when a country imports more than it exports in a given period of time.

SA trade surplus

According to data released by the Reserve Bank (Sarb) today, South Africa’s trade surplus widened from R34.2 billion in the fourth quarter to R103 billion in the first quarter as the value of goods exports increased more than that of merchandise imports.

“The increase in the value of exports of goods and services reflected higher volumes and prices, while the increase in the value of imports of goods and services reflected higher volumes,” the Sarb said.

The shortfall on the services, income and current transfer account narrowed for a third consecutive quarter to R169 billion from R190 billion in the fourth quarter. The Sarb says the smaller deficit emanated from a smaller deficit on the services account, while the deficits on the primary and secondary income accounts increased.

The overall deficit on the services, income and current transfer account as a ratio of GDP narrowed to 2.5% from 2.8% in the fourth quarter. South Africa’s terms of trade, including gold, improved in the first quarter as the rand price of exported goods and services increased while that of imports decreased. 

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More tourist arrivals helped

The Nedbank Group Economic Unit says the shortfall in the services, income and transfer account narrowed for a third consecutive quarter as higher tourist arrivals continued to bolster services receipts. 

The slowdown in merchandise imports was driven by a decline in the basket price, which contracted for the first time since the third quarter of 2019, the unit points out, noting that the basket prices of imports were down 2.4% during the quarter. In contrast, the volume of imports accelerated by 4.4% following a 0.8% contraction in the previous quarter. 

The unit says the current account deficit will probably widen as the year progresses given the unfavourable economic environment. Trade conditions began to moderate at the start of the second quarter, with both exports and imports slowing on the back of deteriorating global and domestic demand conditions.

“The country’s weaker trade performance was further exacerbated by the ongoing energy crisis as well as rail and port inefficiencies and lower global commodity prices. The primary income deficit will likely narrow as bleak corporate earnings prospects weigh on dividend payments, while higher SACU payments should support the secondary income account.”

Nedbank expects the ongoing recovery in international travel to continue to bolster service receipts, although upward momentum may be slightly limited by the weakness in the global economy. 

Economic research group, Oxford Economics Africa, says external conditions are less favourable than they were a year ago, which means South Africa can no longer rely on another global upswing in commodity prices to pull it through.

“We expect South Africa to register a current account deficit equal to 2.8% of GDP this year. Softer macroeconomic fundamentals mean the rand will remain vulnerable to depreciatory pressures in the near term.”

In addition, the group believes 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.

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Role of uncertain global economic environment

“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.”

The group says constraints in logistics infrastructure and load shedding also affect industry, a salient contributor to merchandise exports, negatively, while fixed investment intended to expand existing production capacity is undermined by weaker demand and capital expenditure to find alternative energy generation measures rather than expanding operations.

“South Africa’s government does not have the funds or capacity to address these issues, but the private sector has. Business leaders have grown more vocal in their criticism of President Cyril Ramaphosa and his government’s failure to address the economy’s shortcomings since assuming office in 2018,” the group says.

The group also referred to the recent meeting between Ramaphosa and members of his cabinet with CEOs of leading companies who agreed to set up workstreams targeting the implementation of reforms in energy, transport and logistics, as well as tackling crime and corruption.

“With South Africa facing a multidimensional crisis, the collaboration between the private sector and the state aims to rebuild the economy and restore confidence.”