Rand under pressure as South Africa’s deficit widens

South Africa’s current account shortfall widened in the second quarter in line with analysts’ expectations, as terms of trade deteriorated and the deficit on its services, income and current transfer account increased.

The deficit on the current account, the broadest measure of trade in goods and services, widened to an annualized 2.3% of gross domestic product, or R160.7 billion ($8.4 billion), from a revised 0.9% of GDP in the prior quarter, the South African Reserve Bank said in a statement Thursday.

That matched the median estimate of 12 economists in a Bloomberg survey. South Africa has now posted a current-account shortfall for a fifth straight quarter. 

The deficit was largely driven by a bigger shortfall in the services, income and current transfer account, where tourism income makes up a large part. It increased to R191.8 billion from R174.3 billion in the first quarter, the central bank said.

A smaller annualized trade surplus of R31.1 billion, from R110.6 billion in the first quarter, was insufficient to offset the deficit.

The smaller trade surplus followed an increase in imports and fewer exports. Data from the South African Revenue Service showed there was a surge in imports of machinery and equipment – mostly for electricity infrastructure.

Households and companies are investing in alternative energy sources because of persistent power cuts by Eskom caused by poorly maintained and ageing power stations that aren’t meeting demand.

An economic slowdown in China, South Africa’s biggest trading partner, has also reduced demand for the country’s main export – commodities. 

The data may add to pressure on the rand, which has weakened 2% so far this quarter.

A gap in the current account and a consolidated budget shortfall – the Treasury sees the latter at 4% of GDP for the current fiscal year — are key risks for South Africa because it makes the country vulnerable to external shocks. 

The central bank in July trimmed its forecasts for the current account gap to 1.9% of GDP in 2023 and 2.9% next year.