South Africa’s current account deficit widened sharply over the past year and was expected to average 5.9% of gross domestic product (GDP) in 2012, up from 3.3% in 2011, Finance Minister Pravin Gordhan’s Medium-Term Budget Policy Statement shows.
Over the medium term to 2015/16, the deficit was projected to moderate only slightly to 5.5% of GDP.
The document also confirmed that the National Treasury had lowered its growth projection for 2012/13 to 2.5%, from the 2.7% figure forecast in the February Budget, which itself was a downward revision from the 3.4% forecast in October 2011.
The figure was largely in line with the International Monetary Fund’s revised growth estimate for South Africa of 2.6%. For 2013/14, Gordhan was projecting growth of 3%, as compared with 3.6% previously, rising to 3.8% (4.2%) in the 2014/15 period and to 4.1% at the end of the three-year horizon covered in the statement, often referred to as the mini-Budget.
The trade balance, however, was deteriorating. Export volumes contracted at a yearly rate of 6.3% in the second quarter, after falling by 1.5% in the first.
Import volumes, by contrast, were almost 4% above pre-2009 highs, while exports were 13% below their highs and could be trimmed further by ongoing disruptions to mining activity.
In the year to August, mining output fell by 3.3%, with production of platinum-group metals falling by a material 15.3%.
The National Treasury estimated that R10.1-billion had already been lost to unprotected strike activity in the platinum and gold sectors and that protracted stoppages had the potential to shave yet more from its revenue projections for 2012/13, which had already been cut by R5-billion to an estimated R900.6-billion.
The widening trade deficit, the National Treasury stated, had also been impaired by a steady decline in the country’s terms of trade, or the price of exports relative to imports, which had fallen by almost 5% since the peak experienced in the third quarter of 2010.
The value of exports of coal and chemical products remained robust, but platinum and base metals declined by 21.9% and 6.7% respectively over the first eight months of the year.
Exports to the European Union (EU) and Japan fell during the period, while exports to the US were flat. This pattern was partly offset by growth in exports to China, India and the Southern African Development Community (SADC), with Southern Africa emerging as South Africa’s second-largest export market after the EU.
At 21.8%, the share of manufactured exports to the SADC region was underpinned by purchases of steel, chemical products, and machinery and appliances, especially mining equipment. “With strong growth forecast for the next five years, the SADC region could soon become South Africa’s biggest market for manufactured exports,” the document stated.
But the value of South African imports surged by 20% over the same eight-month period, driven by strong increases in crude oil, machinery and appliances, vehicles and original-equipment components.
Overall, the trade deficit deteriorated to 1.9% of GDP in the first half of the year and net transfer payments nearly doubled as a share of GDP, owing to an increase in net customs revenue payments to the Southern African Customs Union.
The current account deficit was currently being financed by foreign inflows, again underpinning the importance of foreign investor confidence in South Africa’s economic outlook – an issue that had come under intense scrutiny following downgrades by both Moody’s and Standard & Poor’s.
Concerns over investor confidence were also brought to the fore earlier in the week when the United Nations Conference on Trade and Development published an update on foreign direct investment (FDI) flows to South Africa. The report showed that FDI to South Africa in the first half of 2012 was 43.6% lower, at $1.7-billion, than was the case during the same period of 2011.
However, South Africa’s financial account recorded a large surplus in the first six months, showing net inflows of R98.5-billion. Non-resident investors were net purchasers of R83.8-billion of South African bonds in the year to mid-October, and the National Treasury expected the demand for bonds to remain robust, owing to high levels of global liquidity seeking good returns.