South Africa’s current account deficit widened sharply over the past year and is expected to average 5.9% of gross domestic product (GDP) in 2012, up from 3.3% in 2011.

In his Medium-Term Budget Policy Statement Finance Minister Pravin Gordhan indicated that, over the medium term to 2015/16, the deficit was projected to moderate only slightly to 5.5% of GDP.

In the same document the National Treasury confirmed that it had lowered its growth projection for 2012/13 to 2.5%, from the 2.7% figure forecast in the February Budget – itself a downward revision from the 3.4% forecast in October 2011.

The deterioration in the trade balance is the result of a 6.3% contraction in yearly export volumes during second quarter, which fell by 1.5% in the first.

Import volumes, by contrast, are 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 has already been lost to unprotected strike activity in the platinum and gold sectors and that protracted stoppages have the potential to shave yet more from its revenue projections for 2012/13, which had already been cut by R5-billion.

The trade deficit has also been worsened by a steady decline in the country’s terms of trade, or the price of exports relative to imports, which have 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 and Japan fell during the period, while exports to the US were flat. This pattern was partly offset by a growth in exports to China, India and the Southern African Development Community.

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.

The current account deficit is currently being financed by foreign inflows, again underpinning the importance of foreign investor confidence – an issue that had come under intense scrutiny following downgrades by both Moody’s and Standard & Poor’s.

Concerns over investor confidence also came to the fore following a United Nations Conference on Trade and Development reports, showing that foreign direct investment flows to South Africa fell by 43.6% in the first half of 2012.

By contrast, 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.

But the key to stability, surely, must lie in improving the import/export balance.