In Q1 2010 South Africa recorded a current account deficit equivalent to 4.6% of GDP. The market was expecting a deficit of 3.9% of GDP (STANLIB 4.0% of GDP). This compares with a slightly revised deficit of 2.9% of GDP in Q4 2009. In value terms, the current-account deficit widened to R116.1 billion, up from R71.4 billion in Q4 2009 (these are annualised numbers). For 2009 as a whole, the current-account deficit was recorded at R96.6bn (4.0% of GDP).
The larger than expected current account deficit was due to a combination of lower exports (especially into Europe), increased imports and some increase in dividend outflows. More specifically, the trade balance moved from a surplus of R24.9 billion in the final quarter of 2009 to a deficit of R12.9 billion in the first quarter of 2010, while the net dividend outflows rose from R37.9 billion in Q4 2009 to R44.3 billion in Q1 2010. There was also a rise in outward freight costs related to the increase in imports as well as a decline in net tourism flows (which should reverse sharply in Q2 2010).
During Q1 2010, merchandise export volumes fell by a very disappointing 3.3%q/q after gaining almost 6.6%q/q in the final quarter of 2009. Additionally, gold export volumes plunged 16.5%q/q, partly due to lower domestic production related to mine specific problems. Unfortunately, the decline in export volumes more than offset the rise in export prices. South Africa’s balance of payments could have benefitted so much more from the higher commodity prices had the Rand not strengthened so significantly. At the same time the economic troubles in Europe aggravated the situation.
In contrast with the decline in export volumes, SA’s import volumes rose by 2.7%q/q in Q1 2010, after rising by 8.0%q/q in the final quarter of 2009. A range of motor vehicle parts and electrical equipment (including TV sets) increased fairly significantly in the beginning of the year.
The deficit on the services account widened a little in Q1 2010 to 4.1% of GDP from 3.9% of GDP in Q4 2009. It is clear from the charts attached that although the services account has widening significantly over the past few years, it improved in 2009, mainly as a result of a temporary slowdown in dividend outflows. In Q4 2009, net dividend outflows amounted to only 1.5% of GDP, well down from a peak of over 4% of GDP at the end of 2007. This reduction in dividend outflows reflected that fact that company earnings were under significant pressure during the recession. However, in Q1 2010, net dividend outflows widened again to 1.74% of GDP, mainly as a result of an improvement in private sector corporate earnings. This increasing trend in net dividend outflows is likely to continue as the economy and corporate earnings improve.
SA exports are likely to struggle to accelerate significantly in 2010 given the still strong Rand and sluggish world economic recovery (especially in Europe). Additionally, it takes time for SA export companies to establish a more effective presence in the higher growing emerging economies. This implies that the trade balance is likely to remain under some pressure over the coming few quarters; although the deterioration is expected to be fairly modest from current levels.
Fortunately, the services account should benefit from a sharp turnaround in net tourism receipts in Q2 2010 and Q3 2010, which should help to contain or even improve the current account deficit in the short-term (next couple of quarters). Looking further out into 2011/2012, there is little doubt that South Africa’s import demand will rise noticeably as the country continues with an extensive, and possibly unprecedented, infrastructural development programme (led by investment in electricity capacity), and consumer demand improves. Consequently, the deficit on the trade account is set to widen further as more capital and consumer goods are imported. At the same time there is likely to be a further increase in net dividend outflows from the private sector (it is estimated that foreigner’s own around 28% of the JSE), resulting in a systematically larger current account deficit in 2011/2012. This implies that there will be an increased risk of some Rand weakness in the next couple of years.
Hopefully, the development of SA’s infrastructure, especially the port and rail infrastructure, together with a focus on increasing exports to the fast growing emerging economies, will lead to some increase in exports in the years to come.
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