South Africa: Fourth quarter current account deficit narrows to 6.5% of GDP from 6.8% in Q3

South Africa: Fourth quarter current account deficit narrows to 6.5% of GDP from 6.8% in Q3

South Africa’s current account deficit narrowed slightly in the fourth quarter of 2012, falling to R212.6bn from R215bn in Q3. Coupled with the q/q increase of R91.9bn in fourth quarter GDP, the result was that the current account deficit as a percentage of GDP narrowed from 6.8% in Q3 (revised up from 6.4%) to 6.5%. In addition to the trade deficit narrowing from R87.3bn in the third quarter to R86bn, net service, income and current transfer payments also declined in the final quarter, declining from R127.7bn in Q3 to R126.6bn. The net result of these declines was a R2.4bn reduction in the current account deficit in the fourth quarter. Expressed as a percentage of GDP, the current account deficit averaged 6.3% in 2012, a considerable deterioration from 3.4% in 2011.

In the fourth quarter, the volume of merchandise exports fell marginally by 0.2% q/q, as growth in the volume of exported mining and agricultural products was offset by a drop in the volume of manufactured exports. However, the value of merchandise exports rose by 3.8% q/q in Q4, benefitting from higher global commodity prices and a weaker rand. Instability in the mining sector led to reduced gold production, while demand for jewellery (in particular in India and China) remained subdued. Resultantly, the volume of net gold exports fell by 18.3% from Q3 to Q4, its biggest drop since Q1 2008. The value of net gold exports declined to a lesser extent due to a higher rand gold price, falling by 10.2% q/q after a drop of 13.2% in the prior quarter. On the whole, the net result was a 2.5% q/q increase in the value of total exports. Due to weaker demand for goods from abroad, import volumes fell 2.8% in the fourth quarter, its first quarterly decline since Q4 2010. However, the drop in import volumes was offset by a 5% increase in average import prices due to a weaker rand, resulting in a 2.1% q/q rise in the value of imports. Comparing 2012 to 2011, the trade account deteriorated substantially from a surplus of R16.4bn in 2011 to a deficit of R75.5bn in 2012, the result of a 15.4% y/y rise in imports outpacing a 2.8% y/y pickup in exports.

An increase in net income payments to non-resident parties during the fourth quarter was offset by a decline in net payments for “other services”. As a result, the deficit on the net service, income and current transfer account narrowed slightly by 0.8% from the third to the final quarter. Dividend payments fell more than dividend receipts in Q4, resulting in a 1.9% q/q decrease in net dividend payments. However, growth in interest payments to the rest of the world outweighed the rise in interest receipts, leading to a 3.9% increase in fourth quarter net interest payments. Compared to 2011, the deficit on the net service, income and current transfer account widened by 6% from R115.2bn to R122.1bn in 2012, as a decline in net service payments was more than offset by increases in net income and current transfer payments.

Although the narrowing in the current account deficit in Q4 is encouraging, there are already early signs of potential pressure on the deficit in Q1 2013 through developments in the trade account. According to the latest data from SARS, the economy posted a record trade deficit of R24.5bn in January compared to R2.7bn in December as mining exports fell by 19% while machinery imports surged by 35%. Due to labour unrest and uncertainty in the mining sector, mining exports are expected to remain frail, while demand for imports is likely to remain high due to infrastructure spending programmes. The funding of the current account deficit is heavily dependent on capital inflows from abroad. Hence, as global investors continue to seek the highest yields, the widening current account deficit limits the scope for an interest rate cut by the SARB. If the widening in the deficit persists, the rand will come under further pressure, after having already depreciated by nearly 8% against the USD since the start of the year.

Kruger Pretorius