Current account gap widens as global economy slows

South Africa’s current account deficit widened to 7,9% of gross domestic product in the second quarter of 2008, partly due to a slower global economy and softer commodity prices, the South African Reserve Bank said on Tuesday.

The bank said in its December quarterly bulletin declining global demand led to marginal growth in exports, while sluggish local demand saw imports moderate as South Africa’s economy slowed to its weakest level in a decade in the third quarter.

The current account deficit was 7,3% of GDP in the previous quarter.

Concerns about South Africa’s current account deficit along with the impact of the global financial crisis have seen the rand fall more than 30% against the dollar this year.

The bank cautioned in its quarterly bulletin that the weaker rand currency and unit labour costs above the 3% to 6% inflation target range have compounded inflationary pressures, but added that these were contained by a lower oil price.

It said aggregate real gross domestic expenditure rose by 1% in the third quarter after falling by a revised 3,5% in the second quarter.

”Real gross domestic expenditure registered a reversal from negative growth in the second quarter of 2008, as fixed capital formation and government consumption expenditure strengthened,” the central bank said.

South Africa’s exports rose by 1,7% in the third quarter and increased by 3,7% in value terms, while imports rose slightly by 1,3% and were up 4,9% up in value terms.

A decline in global metals prices hurt commodity exports, weighing on the country’s trade balance.

”A substantial contraction in real value was registered by the mining sector, which was directly affected by weaker international demand, falling commodity prices and interruptions due to maintenance, safety procedures and strikes,” the central bank said.

The central bank said the negative imbalance on the service, income and current transfer account widened by 7% in the third quarter mainly due to higher gross dividend payments to non-foreigners, which increased by 23% in the period.

The surplus on the financial account swelled to R60,6-billion in the period compared to R46,1-billion in the second quarter.

But portfolio investments, on which South Africa relies to fund the current account shortfall, registered outflows of R9,1-billion in the third quarter compared to inflows of R27,3-billion in the previous quarter.

”Foreign investors seemed to prefer limiting their exposure to emerging market assets and transferring funds to the familiarity of their home markets,” the bank said.

The central bank said despite numerous actions taken by authorities to stabilise the global financial system, confidence among investors remained low. – Reuters

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