SA current account deficit improved sharply in Q2 2016 to 3.1% of GDP, helped by an increase in export proceeds and a further decline in import volumes

In the second quarter of 2016, South Africa’s current account deficit narrowed sharply to -3.1% of GDP, compared with a revised -5.3% of GDP in Q1 2016. This was in-line with market expectations. In value terms, the current-account deficit narrowed to –R134.39 billion from –R221.48 billion in Q1 2016 (these are annualised numbers). The Q2 2016 current account deficit in the smallest (as a % of GDP) since the final quarter of 2011. For 2015 as a whole, the current-account deficit was recorded at R174.3bn (4.3% of GDP), well up from the 2014 deficit of 5.3% of GDP as well as the 2013 deficit of 5.9% of GDP. For 2016, we expect the current account deficit to narrow to around -3.6% of GDP.

The improved Q2 2016 current account deficit largely reflects an increase in export proceeds, coupled with a fall-off in import volumes. In addition, the shortfall on the services account shrank somewhat in Q2 2016, mainly as a result of a marked decline in transfer payments to the rest of the world.

As mentioned above, SA’s trade balance improved sharply in the second quarter of 2016, recording a surplus of 0.8% of GDP compared with a deficit of -1.1% of GDP in Q1 2016. South Africa’s trade deficit has systematically narrowed from a peak of -2.9% of GDP in the third quarter of 2013 (see chart attached). During the three months from May to July 2016, the volume of SA merchandise exports (non-gold exports) jumped by a dramatic 5.6%q/q. In value terms the improvement was even more impressive, rising by 9.1%q/q, helped by the weaker Rand. Overall, the combination of slightly higher commodity prices, coupled with a still weak exchange rate should help to improve SA export proceeds in 2016.

The volume of SA imports declined by -0.9%q/q in Q2 2016. This follows a volume decline of -2.6%q/q in Q1 2016. Despite the second quarter drop in import volumes, the weaker Rand pushed the value of imports up 1.2%q/q. Fortunately, as mentioned above, the increase in the value of exports exceeded the increase in import values during Q2 2016, leading to a very welcome trade surplus.

Another key development during Q2 2016 was a sustained large net dividend outflow, which increased marginally from –R76.6bn in the first quarter of 2016 to –R77.4bn in the second of the year (see charts attached). This deterioration occurred despite a large increase in dividend inflows during the quarter. (See charts attached). Dividend and interest outflows from South Africa are likely to remain substantial given the large foreign holding of South African bonds and equities.

Unfortunately, there was a marginal deterioration in SA’s travel net receipts during Q2 2016, largely as a result of more South African deciding to travel overseas. In contrast, foreign travel inflows eased back somewhat, despite the relatively weak exchange rate – but the upside potential is very obvious. During the second quarter of 2016, travel receipts fell by R5.5 billion (-4.6%q/q) to R114.8 billion. (The Q1 2016 travel receipts were a record high). Over the past year, SA travel receipts have actually increased by R13.6 billion. South African tourism appears to be slightly less hampered by travel restrictions applied to foreign visitors. In addition, the weaker Rand is, broadly, helping the sector. In terms of outbound tourism, SA’s travel payments (outflows) increased further from R40.8bn in Q1 2016 to a record R41.7bn in Q2 2016 (up R0.85bn quarter-on-quarter). Once-gain, this largely reflects the impact of the weaker exchange rate. We expect many more South Africans to holiday inside South Africa rather than travel overseas over the coming year given the increased cost of foreign travel. The net result was that the surplus on the Travel Account fell in Q2 2016 to R73.1bn, down a record R79.5 billion during Q1 2016. While South Africa’s surplus on the travel account remains encouraging, the country is still not fully exploiting its full potential as a vibrant and growing world travel destination. The tourism sector has the ability to provide a much needed boost to employment, employing many low and semi-skilled service industry workers.

Looking forward, although the world economy continues to recovery from the global financial market crisis, the rate of expansion remains relatively modest by historical standards. (See chart on the growth in world trade). This means that South Africa’s exports are likely to struggle to gain significant momentum, despite the weakness of the Rand. On-going concerns about domestic politics as well as the risk of labour market disruptions argue against a sustained and meaningful expansion of exports capacity. In this regard, improved electricity supply is extremely welcome and could help the mining and manufacturing sectors at a critical time. Given the current slump in the domestic economy, we still expect import demand to ease somewhat over the coming year. This moderation in imports, coupled with some increase in exports should translate into a sustainable improvement in SA’s trade and current account deficit over the next year; which will hopefully ease some of the pressure on the Rand as well as address some of the concerns expressed by the credit rating agencies.

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