SA current account deficit much better than expected in Q2 2015, at -3.1% of GDP

In Q2 2015, South Africa’s current account deficit improved sharply to -3.1% of GDP, from a revised -4.7% of GDP in Q1 2015. This was much better than market expectations for a deficit of around -3.7% of GDP. In value terms, the current-account deficit narrowed to –R124.1 billion from –R185.3 billion in Q1 2015 (these are annualised numbers). The Q2 2015 current account deficit in the smallest (as a % of GDP) since the final quarter of 2011. For 2014 as a whole, the current-account deficit was recorded at R206.6bn (5.4% of GDP), slightly smaller than the 2013 deficit of 5.8% of GDP. For 2015, we expected the current account deficit to have narrowed to around -3.5% of GDP.

The better than expected Q2 2015 current account deficit largely reflects an improvement in South Africa’s trade balance, which moved from a sizeable deficit in Q1 2105 to a small surplus in Q2 2015. Unfortunately, the gain in the trade account was partly offset by an increase in net dividend outflows as well as worsening of SA’s travel account for the first time in three years.

SA’s trade balance improved from a deficit of -1.7% of GDP in Q1 2015 to a surplus of 0.3% of GDP in Q2 2015. This is South Africa’s first quarterly trade surplus since the final quarter of 2011. During the second quarter of the year, the volume of merchandise exports (non-gold exports) rose by a very welcome 4.9%q/q. This follows a rise of 3.4%q/q in the first quarter of the year. This improved export performance partly reflects the recent ramp-up in platinum production following the five month platinum industry strike in 2014. There was also a solid improvement in exports of iron ore, while vehicle exports remained relatively buoyant. Overall, although the gains in South Africa’s export performance remain relatively modest, the combination of higher export volumes and currency weakness is now having a more meaningful impact of South Africa’s current account, helping to offset the decline in commodity prices. Hopefully this can be sustained.

The volume of SA imports declined in Q2 2015, by -1.4%q/q. This follows a volume increase of 3.6%q/q in the first quarter of the year. The fall-off in SA’s imports largely reflects a sharp decline in the volume oil imports (-31%q/q), which more than offset an increase in the volume of non-oil imports. The 31% decline in the volume of oil imports was due to scheduled maintenance shutdowns at several oil refineries. (Oil imports fell to only 7.3% of total imports in Q2 2015, compared with 11.7% of total imports in Q2 2014). However, as would be expected, there was a sizeable increase in SA’s imports of refined oil products such a petrol, in order to compensate for the temporary loss of refinery capacity. If the oil/fuel impact is excluded from the import data, then SA’s import demand is systematically slowing, which reflects the weakness in the SA economy coupled with the increased cost of imports due to the weaker Rand .

As mentioned above, there was a deterioration in South Africa’s net dividend outflows, which fell from –R26.41bn in the first quarter of 2015 to –R44.160bn in the second quarter of 2015 (see charts attached). This deterioration was due to a sharp decline in dividend inflows, which fell from R89.17bn in Q1 2015 to R59.93bn in Q2 2015. This decline more than offset the decline in dividend outflows, which narrowed from –R115.58bn in Q1 2015 to –R104.10bn in Q2 2015. As we mentioned last quarter, the substantial increase in dividend inflows in the first quarter of 2015 was unlikely to be sustained, while dividend outflows are likely to remain substantial given the large foreign holding of South African bond and equities.

Worryingly, there was a sharp decline in SA’s travel receipts during Q2 2015. This largely reflects the impact of the recent introduction additional visa requirements for foreign tourists visiting South Africa. During the second quarter of 2015, travel receipts fell by R9.5 billion (-8.8%q/q) to R98.83 billion, which is the first quarterly decline in SA foreign travel receipts since the final quarter of 2010. Over the past year, SA travel receipts have declined by R0.687 billion. In contrast, travel payments (outflows) increased slightly in Q2 2015 to R37.1bn (up R0.16bn quarter-on-quarter). The net result was that the surplus on the Travel Account fell by a substantial R9.7 billion during Q2 2015. This is obviously extremely unfortunate, both in terms of starving the country of much-needed foreign exchange receipts, but also in terms of restricting the growth of the accommodation industry. The tourism sector has the ability to provide a much needed boost to employment, employing many low and semi-skilled service industry workers. Hopefully the recent negative impact of the additional visa requirements on foreign tourism can be adequately resolved.

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. The recent flurry of domestic labour market unrest and electricity constraints also argue against a sustained and meaningful rise in exports. In this regard, improved stability in the mining and manufacturing sectors would be extremely welcome at this stage of South Africa’s business cycle. 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 could 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.

Download the presentation slides

Please follow our regular economic updates on twitter @lingskevin