S. Africa Current-Account Gap Widens as Dividends Paid Rise

  • First-quarter shortfall 5% of GDP compared with 4.6% before
  • Government forecasts deficit will narrow to 4% this year

South Africa’s current-account deficit widened to 5 percent of gross domestic product in the first quarter as dividend payments by local companies to foreign shareholders increased.

The gap on the current account, the broadest measure of trade in goods and services, widened from a revised 4.6 percent in the fourth quarter of last year, the Reserve Bank said in its Quarterly Bulletin released on Tuesday in the capital, Pretoria. The shortfall is the largest since the first three months of last year. The median of 14 economist estimates compiled by Bloomberg was for a deficit of 4.1 percent.

The persistent shortfall on the current account could undermine the rand, which has lost 25 percent of its value against the dollar since the start of 2015. Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the deficit.

“There could be some downward pressure on the rand,” Azar Jammine, chief economist of Johannesburg-based advisory service Econometrix, said in an interview in Pretoria on Tuesday. “The bigger the current-account deficit, the greater the shortage of foreign exchange and therefore the greater the reliance on foreign capital inflows to try and accommodate that.”

The rand weakened 1.3 percent to 15.3688 per dollar as of 11:34 a.m. in Johannesburg on Tuesday. Yields on rand-denominated government bonds due December 2026 rose nine basis points to 9.20 percent.

Foreign Inflows

Foreign investment in South African stocks and bonds swung to an inflow of 13.5 billion rand ($885 million) from an outflow of 300 million rand in the fourth quarter. Foreign direct investment decreased to 9.9 billion rand from 13.7 billion rand.

“The risk-averseness among international investors was raised by the lackluster domestic economic growth and political uncertainty,” the Reserve Bank said.

Business confidence is at the lowest in almost 23 years after months of political uncertainty which was triggered when President Jacob Zuma appointed a little-known lawmaker as finance minister in December. Zuma reappointed Pravin Gordhan four days later to the position he held from 2009 until 2014.

Junk Rating

The trade gap narrowed to an annualized 38 billion from a revised 41 billion rand in the previous quarter as exports, excluding gold, increased by 0.7 percent to 995 billion rand, driven by an increase in some commodity prices and the weaker rand. Imports rose by 0.8 percent to 1.11 trillion rand.

The shortfall on the services, income and current transfer account widened to an annualized 174 billion rand from 150 billion rand as dividend payments by South African companies to overseas shareholders rose. This was partly offset by a 9 percent increase in gross travel receipts as the weaker rand and easier visa rules boosted tourism income, the central bank said.
 
Both S&P Global Ratings and Fitch Ratings Ltd. this month maintained South Africa’s credit assessment at BBB-, the lowest investment-grade level and warned it could still downgrade the nation’s debt to junk unless measures to boost growth are implemented. The economy contracted 1.2 percent in the first quarter and will probably expand at the slowest rate this year since a 2009 recession, according to the central bank.

South Africa’s fiscal parameters were healthier 16 years ago when S&P became the second rating company to assign an investment-grade assessment to the nation’s debt, the Reserve Bank said.

While the rating companies and international lenders will view a deficit of 5 percent or more negatively, the shortfall on South Africa’s current account could narrow to less than 4 percent of GDP toward the end of the year, Dennis Dykes, chief economist at Nedbank Ltd., said.

“I’m sure the deficit is going to narrow as we go deeper into the year,” Dykes said in an interview in Pretoria. “I think the number has been distorted by once-off factors such as the dividend payments in particular. It’s a bit of a blow, but I don’t think it’s a permanent one.”

The government forecasts the current-account shortfall will narrow to 4 percent of GDP this year from a revised 4.3 percent in 2015.

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