South Africa Current-Account Gap Widens as Customs Payouts Rise

JOHANNNESBURG (Capital Markets in Africa) – South Africa’s current-account deficit widened in the second quarter as the amount paid to the nation’s customs union partners increased.

The shortfall on the current account, the broadest measure of trade in goods and services, increased to 2.4 percent of gross domestic product in the three months through June from a revised 2 percent in the previous quarter, the Reserve Bank said in its Quarterly Bulletin released on Thursday in the capital, Pretoria. The median of 17 economist estimates compiled by Bloomberg was for a deficit of 1.9 percent.

Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the shortfall. The deficit adds pressure to the rand which is the most volatile currency of 16 major and emerging-market nations monitored by Bloomberg. The rand is sensitive to political uncertainty that included a cabinet shuffle on March 31 and two downgrades to junk for the nation’s foreign-currency debt.

“A lot of the improvement that we have seen recently is because of a more favorable terms-of-trade environment, which is helping to prop up South Africa’s trade surplus,” Jeffrey Schultz, a senior economist at BNP Paribas Securities in Johannesburg, said by phone.

The trade surplus widened to an annualized 64.6 billion rand ($4.9 billion) in the second quarter from 57.4 billion rand in the previous three months, the central bank said last week. The volumes of exports, excluding gold, rose 2.9 percent in the period while import volumes increased 3.7 percent, according to Thursday’s report.

The improved trade surplus was partially offset by the shortfall on the services, income and transfer account, which widened to 3.8 percent of GDP from 3.3 percent. This was mainly due to an increase in current-transfer payments by South Africa to its trading partners in the Southern African Customs Union, the central bank said.

The SACU, which consists of South Africa, Botswana, Namibia, Lesotho and Swaziland, was formed in 1910, making it the world’s oldest customs union.

Foreign direct investment in the second quarter was 3.9 billion rand and portfolio inflows stood at 74.7 billion rand, the highest since at least 1985. That was “driven by a search for yield in emerging markets,” the central bank said.

“It’s still a significant financing requirement that is predominantly required through the ‘hot-money’ flows that we have continued to see into our bond market,” Schultz said. “That is a risk going forward, especially with pending ratings downgrades on our local debt and what that could potentially mean for South Africa’s ability to stay in global bond indices.”

While the economy emerged from a recession in the second quarter, fixed capital formation declined by an annualized 2.6 percent in the period. Investment by private business fell 6.9 percent from the previous three months, the most since the first quarter of 2016.

“Fixed-capital formation by the private sector was deterred by subdued domestic demand, ample capacity in some parts of the domestic economy, ongoing political uncertainty and weak business confidence,” the Reserve Bank said.

The rand was little changed at 13.1387 per dollar by 11:19 a.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 were unchanged at 8.44 percent.

The government forecast in February the current-account shortfall will widen to 3.9 percent of GDP this year from 3.3 percent in 2016, which was the smallest gap since 2011.

Source: Bloomberg Business News