South Africa

Bad news for the rand

Finance Minister Enoch Godongwana revealed South Africa’s expanding current account deficit, leaving the rand vulnerable to external shocks.

In the 2024 Budget Review, the National Treasury estimated a current account deficit of 1.8% last year, which points to a poor export market.

The current account deficit indicates that South Africa imports more goods and services than it exports, implying that the country needs to raise capital to support its imports.

“We do not export enough. Put differently, we live above our means in South Africa,” said renowned economist Dawie Roodt.

“If you run a current account deficit and you find that capital flows out of your economy for whatever reason, then your currency will take a major knock.”

As the country becomes more dependent on foreign capital, the demand exceeds the supply of foreign currency, and the value of foreign currency rises. In other words, the rand gets weaker compared to these currencies.

According to the Budget Review, the deficit will widen in years to come, forecasted at 2.8% for 2024 and 3.0% in 2025 and 2026.

Current account balance (% of GDP)-0.5% (actual)-1.8% (estimate)-2.8% (forecast)-3.0% (forecast)-3.0% (forecast)
Source: National Treasury Budget Highlights

In 2022, South Africa saw its first current account deficit in three years. This was a sudden shift from 2021 when the country had a substantial 3.7% surplus.

The change in 2022 resulted from the delayed impact of global supply chain disruptions and Covid-19-related business restrictions. This caused the currency to weaken over the past few years.

In addition, the uncertainty ahead of South Africa’s election weakens the domestic currency, with the election date now set for 29 May. As ANC support continues to decline, South Africa may soon face a change of government.

The rand hovered around R19/USD last week as the local currency felt the pressure of this volatility and the rising uncertainty surrounding South Africa’s fiscal policy.

The rand’s value is also threatened by geopolitical tensions in Ukraine and the Middle East. These conflicts may further disrupt global supply chains, increasing commodity prices and causing inflation to rise in South Africa.

Rising inflation paired with the weakening rand will mean a decline in purchasing power for South African citizens.