World Economy

South Africa Exports Help Narrow Deficit

Weak growth in domestic demand led to a decline in merchandise import volumes.Weak growth in domestic demand led to a decline in merchandise import volumes.

South Africa’s current account deficit narrowed more than expected in the second quarter—the first since the second quarter of last year and the largest since the third quarter of 2011.

Data from the South Africa Reserve Bank showed that the deficit contracted to 3.1% of gross domestic product after exports received a boost from the lagged effect of last year’s rand weakness, supporting Finance Minister Pravin Gordhan’s view that the country was not in “recession territory”, IOL reported.

The bank said weak growth in domestic demand led to a decline in merchandise import volumes.

The trade balance consequently switched from a shortfall of R48 billion ($3.34 billion) in the first quarter to a surplus of R33 billion in the second quarter.

The gap in the current account, the broadest measure of trade in goods and services, narrowed from a revised 5.3% in the first quarter, and the shortfall was better than the market consensus of 3.6%.

Gordhan earlier told business leaders that South Africa had a better than 50% chance of avoiding a downgrade of its credit rating to junk status this year. He also pledged to stick to deficit targets set out in his budget in February, despite weak economic growth.

He warned, however, that the surprising economic growth of 3.3% in the second quarter could not be sustained and pledged continued fiscal prudence, a key recommendation by ratings agencies. He said next year would be quite critical not only for the ratings but for the economy as a whole.

 List of Constraints

Nedbank said the better-than-expected deficit was encouraging, indicating that the shortfall for the year as a whole would narrow as the weaker rand dampened imports, especially for consumer goods.

“On the export side, the weaker rand should boost volumes, but the upside will probably be contained by soft global demand, the commodity price slump, rising domestic production costs and infrastructural constraints,” Nedbank said.

Gross fixed capital formation remained weak, falling by 4.6% in the second quarter. Capital spending by the private sector dropped 3.1%, but the rate of contraction improved from more than 13% in the first quarter.

Hanns Spangenberg, an analyst at NKC African Economics, said while a narrower current account was positive for international investors, as was highlighted by the knee-jerk appreciation of the rand, the nature of the deficit remained structural.