South Africa

South Africa moves to a current account deficit

South Africa’s current account swung to a shock deficit in the second quarter as dividend payments to foreign investors resulted in the biggest outflow in 15 years.

The overall balance on the current account, the broadest measure of trade in goods and services, switched to an annualized deficit of 1.3% of gross domestic product, or R87 billion, from a revised 2.4% surplus in the previous quarter, the South African Reserve Bank said in a report on Thursday.

Only one of 11 economists in a Bloomberg survey forecast a deficit to GDP.

The deficit was “largely due to higher dividend payments by companies with a direct investment relationship,” the bank said. “Direct investment relationship refers to entities where a single foreign direct investor owns 10% or more of the voting rights in that entity.”

Central bank data showed that the current account deficit was the first since the second quarter of 2020.

The shortfall on the primary income account as a percentage of GDP was 3.8% in the three months through June – the highest ratio since the fourth quarter of 2007.

The rand extended its losses after the data was released and traded as much as 0.8% weaker against the dollar by 12:21 p.m. in Johannesburg.

The swing to a deficit and a contraction in GDP over the same period – erasing the post-Covid-19 growth gains – means there “will be no room for complacency, or being dovish on the inflation outlook at the South African Reserve Bank,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank. She was the only analyst in the Bloomberg survey to forecast a deficit to GDP.

The data may tilt risks to another 75 basis-point hike when the central bank announces its latest monetary policy stance on 22 September, she said.

The central bank has raised rates by 175 basis points this year to curb inflation that’s running at the fastest pace in 13 years and stem portfolio outflows – with a surprise 75 basis point increase in July.

Key factors relating to the current account deficit:

  • The unanticipated current account deficit may add further pressure on the rand, which has weakened 8% against the dollar this year as investors flock to the US currency on expectations of aggressive interest-rate hikes by the Federal Reserve to quell surging inflation.
  • The negative balance was mainly driven by a shortfall in the services, income and current-transfer account, widening to R358 billion in the second quarter, compared with a revised 216 rand billion in the prior three months. The deficit as a ratio of GDP increased to 5.5% from a revised shortfall of 3.4% – the largest since the first quarter of 1986.
  • The shortfall was largely driven by the nation’s primary-income account deficit, which reflects outflows due to dividends and interest payments to foreign shareholders widening to 250 billion rand in the quarter from R98 billion – the largest monetary value since at least 1960, according to central bank data.
  • The annualized trade surplus narrowed by more than a quarter to R272 billion, from R372 billion in the first quarter. That’s as the value of merchandise imports increased more than the value of goods exports.


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