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South Africa’s current-account deficit widens to 6.8% of GDP

Franz Wild, Mike Cohen

The Reserve Bank's last quarterly update for the year shows that the current-account deficit widened to the biggest gap in half a decade.

The South African Reserve Bank released its quarterly update on Tuesday. (Gallo)

South Africa’s current-account deficit widened to 6.8% of gross domestic product in the third quarter, the biggest gap in more than five years, as a weak rand boosted import costs while strikes and subdued global demand hurt exports.

The gap in the current account, the broadest measure of trade in goods and services, grew to an annualised R233-billion, the Reserve Bank said in its Quarterly Bulletin, released today in Pretoria. The median estimate of 11 economists surveyed by Bloomberg was for a deficit of 6% of GDP. The second-quarter shortfall was revised to 5.9% from 6.5%.

"A higher volume of merchandise imports coincided with a firm increase in the rand price of such imports, lifting South Africa’s import bill significantly over the period,” according to the report. “Exports were constrained by lustreless export markets and domestic supply-side constraints," such as strikes.

The rand has plunged 18% against the dollar this year. Subdued international demand has left manufacturers struggling to take advantage of the weaker currency to boost exports.

External imbalances
"If it were not for the revision in the previous quarter, the deficit would have been 7.4%," Ilke van Zyl, an economist at Vunani Securities in Johannesburg, said by phone. "We need ever-increasing financing to fund our external imbalances, which is a worry. It’s an ongoing symptom of the mismanagement of the country."

The rand fell as much as 0.5% against the dollar after the release of the data. It traded at 10.30 per dollar at 10:21 am, down from 10.27 late on Monday.

Strikes in the automotive industry hampered exports of manufactured goods, with vehicle shipments dropping "substantially" in the third quarter, the bank said. Carmakers including Volkswagen and Toyota Motor Corp. resumed full production in October after a four-week strike over pay by workers at vehicle assembly and auto-component plants.

Commodity prices
South African exports of platinum, copper, iron ore, nickel and coal gained in rand terms even as the dollar prices for the commodities fell, the report said. The volumes of gold shipments and the metal’s falling price meant its contribution to the value of exports declined in the quarter, it said.

South Africa has the world’s largest-known reserves of platinum, used in the automotive industry, and chrome. It’s also the sixth-biggest gold producer.

The Reserve Bank adjusted current-account deficit figures from 2010 after the South African Revenue Service revised trade data to include exports and imports from Botswana, Lesotho, Namibia and Swaziland, which are in a customs union with South Africa.

The current-account gap is mainly financed from inflows from abroad into the nation’s bond and stock markets. The Reserve Bank’s data shows foreigners increased their holdings of South African assets even as the US Federal Reserve indicated it may reduce the monetary stimulus that’s helped to support global growth.

Weak demand
"Despite lingering uncertainty regarding future capital flows to emerging-market countries following the announcement by the US Federal Reserve of its intention to scale down current accommodative monetary policy measures by tapering asset purchases, South Africa recorded a substantial inflow of portfolio investment," the central bank said.

Foreign portfolio investment surged to R48.8-billion in the third quarter compared with an outflow of R5.2-billion in the previous three months, according to the report. Still, net purchases of the nation’s bonds by non-residents stood at R28-billion so far this year, compared with R93.5-billion for the whole of 2012, it said.

Demand in the South African economy slowed in the third quarter, with growth in gross domestic expenditure, which includes spending by consumers, the government and businesses, easing to 1.9% from 2.7% in the previous three months, the central bank said. – Bloomberg

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