South Africa Posts Smaller Current-Account Gap Than Expected

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South Africa posted a smaller current-account deficit than economists estimated in the first quarter, giving the rand some temporary relief.

The gap on the current account, the broadest measure of trade in goods and services, eased to 4.8 percent of gross domestic product from 5.1 percent in the previous three months, the Reserve Bank said in its Quarterly Bulletin released on Tuesday in the capital, Pretoria. The median estimate of 20 economists in a Bloomberg survey was for the shortfall to stay unchanged.

The current-account gap has been a source of weakness for the rand and the improvement last quarter may help to support the currency after it depreciated 5.3 percent against the dollar this year. The smaller deficit was mainly due to a decline in dividend payments to foreign investors, which offset a slump in exports as power shortages and weak global demand curbed manufacturing and mining output.

“The rand is likely to react relatively favorably to a slightly narrower current account deficit but I don’t think the vulnerabilities regarding the currency have really disappeared,” Jeffrey Schultz, an economist at BNP Paribas Cadiz, said by phone from Johannesburg. “We are still running a deficit that is close to 5 percent of GDP and it still requires a significant amount of financing.”

The rand initially pared its decline to 12.1235 against the dollar after the data was published, before weakening to 12.2117 as of 3 p.m. in Johannesburg.

Portfolio Inflows

Exports, excluding gold, fell 2.3 percent to an annualized 937 billion rand ($77 billion) in the three months through March, while imports rose 1 percent to 1.1 trillion rand, according to the report. Import demand climbed as consumer spending grew 2.8 percent in the first quarter from 1.6 percent in the previous three months, the bank said.

South Africa, which relies mainly on foreign investment in stocks and bonds to help fund its current-account deficit, posted an inflow of 39.3 billion rand in portfolio investment in the first quarter, compared with an outflow of 16.8 billion rand in the previous three months. That also helped offset an outflow of 22.2 billion rand in foreign direct investment, according to the report.

The International Monetary Fund said in a statement on Tuesday that the current-account deficit will probably narrow to

4.8 percent of GDP this year from 5.4 percent in 2014 because of lower oil imports. That improvement “is expected to be greater than most emerging markets” and help lower the nation’s external vulnerability, the Washington-based fund said.

Consumer Spending

Over the medium term, the shortfall is set to remain above the norm of 2 percent of GDP as competitiveness remains weak, the IMF said.

An improvement in consumer spending helped to spur growth in gross domestic expenditure to an annualized 3.4 percent in first quarter from 0.3 percent in the previous three months. Government spending contracted 1.9 percent from a 1 percent gain in the same period, while investment spending growth slowed to

1.8 percent from 2.6 percent.