In Q3 2011, South Africa recorded a current account deficit equivalent to 3.8% of GDP. The market was expecting a deficit of 3.7% of GDP (Stanlib 3.6%).
The latest current account reading compares with a revised deficit of 2.9% of GDP in Q2 2011 and 2.6% of GDP in Q1 2011. In value terms, the current-account deficit widened to –R114.6 billion from –R83.6 billion in Q2 2011 (these are annualised numbers).
For 2010 as a whole, the current-account deficit was recorded at -R74.96bn (2.8% of GDP).
The increased current account deficit in Q3 2011 was mainly due to a sharp rise in dividend outflows. In addition, the surplus on the trade account continued to narrow, driven mainly by increased imports. Fortunately, there was a very noticeable improvement in the travel account, mainly as a result of a rise in inward bound tourism, which helped to moderate the widening of the current account deficit.
SA’s trade balance narrowed to a mere 0.6% of GDP in Q3 2011, from 0.9% in Q2 2011, 1.2% in Q1 2011 and a recent high of 2.2% of GDP in Q4 2010. This narrowing of the trade surplus reflects mainly a rise in imports, which increased by a substantial 4.6% (in volume terms) in Q3 2011. The higher volume of imported goods was primarily as a result of a rise in consumer demand and some increased spending on capital equipment.
In contrast, the volume of crude oil imports declined in Q3 2011 as some of the oil refineries were closed for scheduled maintenance work.
South Africa’s import penetration ratio rose from 23.1% in the second quarter of 2011 to 23.9% in the third quarter, an indication of an increased proportion of domestic demand being satisfied by imports. Merchandise export volumes rose by a much more subdued 1.0% in Q3 2011, partly reflecting the sluggish state of the world economy.
The deficit on the services account widened meaningfully in Q3 2011 to 4.5% of GDP from 3.8% of GDP in Q2 2011. During the third quarter of 2011, dividend outflows totalled a very substantial R91.8bn (or 3.1% of GDP), up dramatically from R66.6bn in Q2 2011. The dividend outflows are the largest since Q4 2007. In addition, dividend inflows dropped to a somewhat disappointing R17.2bn in Q3 2011 (0.6% of GDP), down from R21.6bn in Q2 2011. The net result was a sharp increase in net dividend outflows, rising from R44.9bn in Q2 2011 to R74.6bn in Q3 2011 (now 2.5% of GDP).
This trend is expected to continue over the coming quarters. The rise in dividend outflows is not all that surprising given that foreign investors have continued to accumulated a significant proportion of the SA bonds and equities. It is estimated that foreign investors own approximately 25% to 30% of both the SA bond and equity markets. We need to also recognise that SA companies have undertaken worthwhile offshore investments (including within Africa) and that these investments are yielding a reasonable return, a portion of which is regularly remitted to South Africa. Offcourse, dividend outflows far out-pace dividend inflows (see chart attached).
The recent trend in the travel account, especially in the past three months, is worth exploring in more detail. During the third quarter of 2011, travel receipts improved sharply, rising by R7.0 billion to R72.8 billion. This follows a gain of R3.6 billion in Q2 2011. The turnaround in travel receipts is extremely welcome, given the disappointing fall-off in inward bound tourism following the world cup in 2010. Hopefully the current trend can be maintained, especially given the fact that SA has established a higher profile for itself, globally, boosted by some major sporting events, inclusion in G20 and the BRICS as well as the hosting of some major conferences (COPE 17).
Travel payments (outflows) eased in Q3 2011 as South Africans pulled-back their spending on international travel. The net result was that the surplus on the Travel Account increased by a welcome R8.4 billion in Q3 2011 to R34.7 billion, helping to cushion the deterioration of the current account.
Looking forward, SA import intensity is likely to continue to rise as domestic expenditure improves (albeit modestly); especially if there is a pick-up in fixed investment activity into 2013. This implies that the trade balance could be under some pressure over the coming 12 to 24 months; although the deterioration is expected to be fairly modest.
In addition, dividend/interest outflows are also likely to widen further over the next 12 to 24 months given the increased foreign holding of SA bonds and equities. Consequently, a systematically larger (but still manageable) services and current account deficit is anticipated for 2012 and 2013.
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