US war in Iran hits South Africa hard

South Africa’s current account slumped into a deficit in the second quarter as the nation’s trade surplus narrowed sharply and imports increased more than exports due to the fallout from the war in Iran.

The balance on the current account – the broadest measure of trade in goods and services – turned to a deficit of 2.6% of GDP, or R205.5 billion.

This marks a significant swing from a 2.3% surplus in the previous quarter, the South African Reserve Bank said in a report on Thursday. 

The shortfall was much higher than the 1.3% of GDP median estimate of seven economists surveyed by Bloomberg.

The quarterly deficit as a percentage of GDP was the largest since the third quarter of 2019, according to the central bank’s data.

The rand depreciated 0.8% against the dollar to almost 16.18 as at 14:58 local time. 

The deterioration was driven by the trade surplus narrowing to R146.4 billion from R428.8 billion in the first quarter and the value of merchandise imports increasing more than merchandise and gold exports, the Reserve Bank said.

The value of exports of goods and services increased by R92.3 billion in the quarter, reflecting higher prices and volumes, while the value of imports rose by R376.6 billion due to increases in both volumes and prices, it said.

The sharp rise in global fuel prices, linked to supply concerns stemming from the war in Iran, played a key role in the abrupt shift in the trade balance, the central bank said.

It noted that the value of crude oil imports increased by 82% while the physical quantity imported rose by only 1.8%.

“Looking ahead, the current account is expected to remain under pressure as the external environment remains highly uncertain,” Nedbank’s Economic Unit said in a note.

“Renewed escalation in US-Iran conflict, together with ongoing disruptions to shipping through the Strait of Hormuz, have pushed oil prices back above $100 per barrel, with little indication of a near-term resolution.”

The larger-than-anticipated deficit on the current account coincides with the first full quarter to reflect the impact of the Iran war, which began when the US and Israel attacked the Islamic Republic on 28 February.

The conflict has constrained traffic through the Strait of Hormuz, a key trade artery, sending oil and fertiliser prices soaring.

Data published earlier this week showed South Africa’s economy posted a larger-than-expected contraction of 0.2% in the three months through June, breaking a growth streak of six consecutive quarters that had been buoyed by exports.

South Africa’s terms of trade also deteriorated in the three months through June, hurt by the rand price of imports increasing more than that of exports.

The shortfall on the services, income and current transfer account widened to R351.9 billion from R247.2 billion.

As a share of GDP, the deficit widened to 4.5% from 3.1% in the first quarter, marking the largest gap since the second quarter of 2022.