South Africa’s Current-Account Gap Widens As Exports Fall

  • Nation avoided credit-rating downgrade to junk this month
  • Government forecasts deficit at 3.9% of GDP for 2016

QuickTake: South Africa's Scandal and Strife

South Africa’s current-account deficit widened in the third quarter as exports of the nation’s mining and factory produce fell due to weaker international demand and a stronger currency.

The gap on the current account, the broadest measure of trade in goods and services, widened to 4.1 percent of gross domestic product in the three months through Sept. 30 from a revised 2.9 percent in the preceding quarter, the Reserve Bank said in its Quarterly Bulletin released on Friday in the capital, Pretoria. The median of 16 economist estimates compiled by Bloomberg was for a shortfall of 3.6 percent.

Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the deficit. While the nation averted a credit-rating downgrade to junk this month, foreigners have been net sellers of South Africa’s debt and equity since the start of the fourth quarter, according to data from the Johannesburg Stock Exchange. That was due to increased emerging-market uncertainty after the election of Donald Trump as U.S. president and bets that the Federal Reserve will accelerate the pace of interest-rate increases. Domestic political turmoil also spooked investors.

“With the expected Fed interest-rate hike, we could see short-term capital flowing out of emerging-market assets, and that includes South African assets, which could put the currency under pressure and raise the pressure on funding the current-account deficit,” Isaac Matshego, an economist at Nedbank Ltd. in Johannesburg, said by phone. “The Trump administration poses another risk, regarding his stance on trade issues, which could hurt emerging markets in the short term and that could definitely raise the challenge of drawing short- or long-term inflows.”

Foreign direct investment in the third quarter was 7 billion rand($510 million), compared with 8.6 billion rand in the preceding three months. This was mainly in the form of loans by foreign holding companies to their South African subsidiaries, the central bank said. Investment in South African stocks and bonds recorded inflows of 38.8 billion rand compared with 33 billion rand in the second quarter as investors looked for higher-yield securities.

Trade Shortfall

Mining companies, especially in the platinum industry, drew down their inventory levels and boosted exports in the second quarter, resulting in a trade surplus of 48 billion rand. This turned around in the three months through September as weaker global demand and a stronger rand led to a drop in export volumes and values, causing a shortfall of 4 billion rand on the trade account.

The volume of exports, excluding gold, fell 7.5 percent and the value of these goods was 7.2 percent lower at 1.03 trillion rand, according to the report. Import volumes were 1.9 percent down and the value of goods brought in declined by 3.2 percent to 1.08 trillion rand.

The trade shortfall was due to “weaker international demand for domestically produced goods,” the central bank said in its bulletin. “Export earnings were also affected by the strengthening in the exchange value of the rand, which more than offset the benefit arising from higher international commodity prices.”

The rand gained 7.3 percent against the dollar in the third quarter, even as the currency remains sensitive to global events and domestic political turmoil. The currency weakened 0.4 percent to 13.7050 per dollar by 12:24 p.m. in Johannesburg on Friday. Yields on rand-denominated government debt due December 2026 rose three basis points to 8.92 percent.

Dividends Down

The shortfall on the services, income and current transfer account widened to an annualized 172 billion rand from 171 billion rand, the Reserve Bank said. Gross dividends payments to the rest of the world decreased due to the weak domestic economy, and dividends received also declined, according to the report.

Rating companies including S&P Global Ratings, which kept its assessment of South Africa’s foreign-currency debt at one level above junk this month, warned that political interference in government policy could lead to a downgrade. Political turmoil, including the now-dropped fraud charges against Finance minister Pravin Gordhan, has overshadowed some of the government’s efforts this year to boost investor and business confidence.

The government forecasts the current-account shortfall will narrow to 3.9 percent of GDP this year from 4.3 percent in 2015.

— With assistance by Simbarashe Gumbo

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