South Africa recorded a shock trade deficit of R11.4-billion in March, outpacing market expectations of a R1.5-billion decline, thanks in large part to steep import increases, particularly oil, and declines in exports.
According to economists, Eskom’s reliance on oil-guzzling, peaking power plants to keep the lights on have contributed to the deepening deficit, alongside strikes in the mining and manufacturing sectors over the last year, which have hurt exports.
The value of imports rose steeply by 11.6% month on month, or R9.5-billion, while exports declined by 3% month on month, a drop of R2.5-billion, according to Stanlib chief economist Kevin Lings.
The increase in imports included a massive 37% month on month rise in mineral imports, which includes oil-related products, Lings said in a research note.
The decline in exports meanwhile included a 17% month on month loss in exports of mineral products including coal – a drop of R3.65-billion.
The data was “out of sync” with recent trends towards a narrowing trade deficit and was “clearly a major worry given that there are already heightened concerns about South Africa’s ability to finance an extremely large current account deficit on a sustained basis”, said Lings.
March trade data
“Prior to the release of the March trade data, there was growing evidence to suggest that the weaker rand is slowly starting to improve South Africa’s trade position,” he continued.
According to Lings, extensive labour market disruptions in the mining and manufacturing sectors had severely undermined South Africa’s export performance over the past 18 months.
It also took time for exporters to improve their presence in global markets, while local companies had difficulty substituting domestic products for imported products when the rand weakened, he noted.
The ongoing strikes at South Africa’s largest platinum mines in the Rustenburg area are ensuring that producers are quickly depleting their refined platinum reserves.
“Once this happens, South Africa’s exports of platinum are likely to weaken significantly, delaying the anticipated improvement in the monthly trade balance,” said Lings.
David Faulkner, South Africa economist at HSBC said that although the effect of the platinum strike was evident in the export numbers, with precious metals exports declining for a second consecutive month, the more damaging development for exports in March was the sharp fall in mineral exports, consistent with a decline in coal exports from Richards Bay Coal Terminal during the month.
Meanwhile, Investec’s Annabel Bishop said the jump in oil imports has been aggravated by Eskom’s use of expensive peaking power plants in recent months as it battles with the short electricity supply.
“March and April saw limited spare electricity capacity as generating units were shut down to undertake preventative maintenance ahead of the winter months,” Bishop said in a research note.
“Expensive oil-powered generators were relied upon to provide power to the grid in peak periods, and this has negatively impacted the trade figures.”
The ongoing electricity constraints have required that South Africa’s large industrial companies either temporarily shut down or cut back 20% of their production, well above previous requirements of a 10% reduction, which will negatively impact economic growth, argued Bishop.
But steady recovery in world growth, coupled with rand weakness and the hope that labour market conditions, especially in the gold and platinum sectors, could improve South Africa’s export performance in the coming 12 to 24 months, said Lings.
“Unfortunately, as we mentioned in past months, the progress is likely to be slow and relatively moderate,” he said.