SA current account deficit narrows significantly - Sarb

13 September 2016

Cape Town - South Africa's current account deficit narrowed significantly to 3.1% of the gross domestic product (GDP) in the second quarter of 2016, the SA Reserve Bank (Sarb) announced on Tuesday.

It said this smaller shortfall on the current account was financed through net portfolio and direct investment inflows, while other investment registered a net outflow.

Sarb added that total gross loan debt of national government seemed to be levelling off as a ratio of GDP, while the non-financial public-sector borrowing requirement also narrowed somewhat in the first quarter of fiscal 2016/17.

According to Nedbank's economic unit, the latest data is better than the market consensus of 3.6% and down from a revised 5.3% (previously 5%) in the first quarter.

"A better-than-expected current account deficit is encouraging, indicating that the current account deficit for the year as a whole will narrow as the weaker rand dampens imports, especially for consumer goods," Nedbank commented.

"On the export side, the weaker rand should boost volumes, but the upside will probably be contained by soft global demand, the commodity price slump, rising domestic production costs and infrastructural constraints."

Sarb said that, while SA’s foreign assets continued to exceed its foreign liabilities, the net international investment position receded to 13.3% of GDP at the end of March 2016, as the market value of the country’s foreign liabilities increased marginally, while that of foreign assets declined.

SA’s gross gold and foreign-exchange reserves amounted to $45.7bn at the end of August 2016, and covered on average 5.3 months’ worth of imports of goods and services in the second quarter of 2016.

In Sarb's view, national government’s budgeted plans seemed to be on track, with revenue increasing at a faster pace than expenditure in the first quarter of fiscal 2016/17.

"Consistent with subdued domestic economic activity, corporate income tax collections increased sluggishly, but to the contrary personal income tax collections increased at a double-digit rate. Revenue from import duties also increased strongly, buoyed by the relatively weaker domestic currency which raised the rand value of imports," said Sarb.

Trade account

The latest Sarb data shows SA's trade account switched to a surplus of R33bn on a seasonally adjusted basis from a R48bn deficit in the first quarter. The financial account surplus narrowed to 0.5% of GDP from a revised 3% (previously 2.6%).

Growth in real disposable income increased by a seasonally adjusted and annualised 0.7% quarter-on-quarter (q/q) in the second quarter - from 0.4% in the first. Nedbank pointed out that this is helping to contain the ratio of household debt to disposable income to 75.1% from 75.7%. The debt service cost ratio rose to 9.8% from 9.7%.

The primary balance recorded a deficit of 0.7% of GDP in the first quarter of fiscal 2016/17, demonstrating progress with fiscal consolidation when compared with the value of 1.7% of GDP registered in the first quarter of fiscal 2015/16, according to Sarb.

"Gross fixed capital formation dropped by a seasonally adjusted and annualised 4.6% following a sharp 10% drop in the previous quarter, with capital outlays by the private sector, public corporations and general government contracting over the quarter," said Nedbank.

"Given the weak economic prospects in the short term, restructuring will probably continue in the key sectors, resulting in cutbacks to capital expenditure among private firms. Therefore, gross fixed capital formation is likely to remain weak in 2016."

In Nedbank's view, Sarb's Monetary Policy Committee (MPC) is expected to focus more on the upside risk to inflation emanating from the rand's sharp slide in recent weeks and the threat of even further weakness in the months ahead. This is given the combination of increased global risk aversion and the expected rise in US interest rates.

"We still believe that there is a chance of another 25 basis points hike early in 2017," said Nedbank.

By late morning the rand was trading 0.94% stronger at R14.25 to the dollar.

This article first appeared on Fin24, see here.