South African Current Account Deficit Widens to 3% of GDP on Cheap Imports

South Africa’s current account deficit widened in the third quarter from a six-year low in the previous three months as a stronger rand fuelled demand for cheaper imports and tourism revenue fell following the end of the FIFA World Cup.

The shortfall, the broadest measure of trade in goods and services, reached 3 percent of gross domestic product compared with 2.5 percent in the second quarter, the Reserve Bank said in its Quarterly Bulletin released in the capital, Pretoria, today.

Consumers are buying more imported goods as the rand’s 11 percent surge against the dollar since June 1 cuts the price of items such as DVD players and microwave ovens, while interest rates are at a 30-year low. South Africa had no difficulty financing the current account deficit, as foreign investors more than doubled their purchases of local bonds last quarter to 41.2 billion rand ($6 billion), lured by higher yields, the bank said.

“The more accommodative monetary and fiscal policy measures adopted by many developed countries to deal with the aftermath of the global financial crisis continued to bolster investment flows into high-yielding emerging-market assets,” the Reserve Bank said in its report.

Foreign portfolio investment, which includes purchases of stocks and bonds, climbed to 45.8 billion rand in the third quarter from 28.4 billion rand in the previous three months, the bank said.

‘Achilles Heel’

Africa’s biggest economy relies on foreign portfolio investment to fund the current account deficit, flows that have fluctuated depending on investors’ appetite for riskier assets. The government has referred to the shortfall as the nation’s “Achilles heel,” while the International Monetary Fund has recommended South Africa take measures to attract more foreign direct investment instead.

Direct investment by foreign companies dropped to 1.1 billion rand last quarter from 2.9 billion rand in the previous three months, according to the central bank.

Export volumes, excluding gold, increased 6.4 percent, though this was offset by a stronger rand and lower prices for coal, platinum and nickel, the bank said. Imports rose 5.4 percent in the quarter, with the currency’s appreciation helping to cut import prices by 2 percent.

The current account gap was expected to reach 3.2 percent of GDP in the third quarter, according to the median estimate of 16 economists surveyed by Bloomberg. The deficit amounted to an annualized 79.2 billion rand, compared with 66.6 billion rand in the second quarter, the central bank.

To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net.

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