Upturn in SA’s balance of trade is not all good news, but will please rating agencies

South Africa’s second trade surplus two months in a row is a strangely positive development for an economy that is expected to record no growth this year.

But with the good comes the bad. Although the surplus is the result of growing exports, thanks to better commodity prices and a weak currency. Sharply slowing imports make the trade balance look better but they largely result from a weak economy.

As reported by the South African Revenue Services (Sars), there was a trade surplus of R12.5-billion in June, following a surplus of R18.36billion in May. The cumulative surplus for the first half of the year is R12.5-billion, compared with a deficit of R22.9-billion for the first half of last year.

The trade deficit of R48.63-billion in 2015 was a vast improvement on the R82.27-billion deficit in 2014. And, with the latest numbers, this improving trend is expected to continue in the second half of 2016, according to Stanlib’s chief economist, Kevin Lings.

Exports for the year to date of R556.41-billion are 11.3% more than the exports of R499.79-billion recorded in January to June 2015, according to Sars. Imports for the year to date of R543.90-billion are 4.0% more than the imports recorded in January to June 2015 of R522.74-billion.

Lings said the market had expected a surplus for June, but the forecast had been R8.8-billion.

The weak rand, which lost about 18% against the dollar in the past year, has boosted exports, contributing to the trade surplus. Exports have grown almost proportionately to the weaker rand, at 17.2% year on year in rand terms.

“The weaker rand appears to be slowly helping South Africa’s exports, although the improvement is not broad-based,” said Lings. “The idea that the weak currency would increase exports … hasn’t worked out. We have actually lost capacity, but it would appear in some selected areas we have gained traction.”

Commodity prices have lifted off December lows and, with metals typically contributing 17% to export earnings, even a modest improvement has helped to bolster the trade balance.

The gold price moved from $1 120 an ounce in early January to $1 360 this week. Platinum has gone from $877 an ounce to nearly $1 170 at present.

Over the past year, the data shows imports have increased by 8.8% year on year in rand terms, but this is modest given the extent of currency weakness. “In other words, in volume terms, the growth in imports into South Africa has slowed sharply. This is closely linked to the country’s overall economic performance,” said Lings. He said import demand, as linked to economic growth, is expected to remain subdued in 2016.

Already the imports reflected less investment in big-ticket items, such as machinery and other fixed income spending by the private sector, which was essentially in recession, he said.

Isaac Matshego, at the Nedbank group economic unit, said the low oil price this year – at $29 a barrel in January and increasing to $42 currently – had meant lower imports year on year.

He also said the currency had affected imports such as vehicles.

Vehicle sales data released on Monday showed total sales slumped by 17% (44 883 units) from a year ago, the steepest decline since September 2009. Lower demand saw car dealers importing fewer vehicles, Matshego said.

Kamilla Kaplan, of Investec, said, although commodities had experienced a small revival in the first half of the year, they were expected to remain low.

Matshego said the effect of the drought had been overestimated and agricultural exports surprised on the upside, while imports were lower than expected.

Lings said it was likely that South Africa could have a trade surplus for 2016 as a whole. The current account deficit was last measured at just over 5% of gross domestic product in the first quarter of 2016.

The credit ratings agencies have regularly noted the size of South Africa’s current account deficit as being of concern, and they are likely to take the narrowing into account when reassessing the sovereign rating later this year.

The wider the trade deficit, the higher the risk, said Kaplan, adding that a narrowing deficit would ultimately serve South Africa well as an investment destination.

“Following Brexit, central banks in advanced economies are expected to keep rates down for longer,” she said. “Fundamentally, nothing has changed in the emerging markets but if the rand retains its strength, it will help dampen our inflation and hold off rate hikes.”

Matshego warned that, as wage negotiations get underway, strikes in the mining, energy and manufacturing sectors could disrupt production and affect exports.

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