The South African current account deficit on the balance of payments widened to 5.1 percent of gross domestic product (GDP) on a seasonally adjusted annualised basis in the fourth quarter of 2015 from a revised 4.3 percent (previously 4.1%) and 3.1 percent in the third quarter of 2015, the South African Reserve Bank (SARB) said in its latest Quarterly Bulletin. Economists had expected the current account deficit to be little changed from the third quarter.
The rand has weakened considerably over the past few years versus the US dollar as a current account deficit above 3 percent is seen as unsustainable. This vulnerability results in volatility especially when events such as the Marikana Tragedy and Nenegate shake investor confidence.
On annual basis, the current account deficit narrowed to 4.4 percent of GDP in 2015 from 5.4 percent in 2014 and 5.8 percent in 2013. It was only 1.5 percent in 2010. Widening current account deficits mean that the country’s domestic production is unable to keep pace with domestic demand, so South Africa’s real GDP growth rate as measured from the production side has slipped from 3.2 percent in 2011 to 2.2 percent in 2013 and 2012, 1.5 percent in 2014 and 1.3 percent in 2015.
The narrowing in the current account deficit in 2015 is in large measure due to the collapse in the oil price as South Africa is a large importer of oil and petroleum products with an estimated 20 percent of domestic demand for petroleum products being met by imports. The weaker rand has also boosted manufactured exports to the rest of Africa, but the fall in non-oil commodity prices has hurt exports to Asia and Europe. The net effect was that real exports grew by 9.0 percent in 2015 after a 2.6 percent rise in 2014, while imports grew by 5.7 percent in 2015 after a small 0.5 percent contraction in 2014.
The SARB said the US dollar price of non-gold export commodities declined by 7.7 percent in the fourth quarter of 2015 following a drop of 8.5 percent in the third quarter as the prices of copper and nickel decreased further on account of, among other factors, weakening manufacturing output in China. For 2015 as a whole, the US dollar price of a basket of South African-produced non-gold export commodities fell by no less than 21.5 percent following a decline of 9.4 percent in 2014.
South Africa as a small open economy has a large exposure to its foreign trade sector with exports of goods and services accounting for 31.7 percent of GDP in 2015, while imports have a 31.1% share of GDP. In the recession year of 2009, exports only accounted for 27.9 percent of GDP, while imports had a 27.5 percent share.
The current account deficit has to be financed, so the rand is subject to investment flows, whether foreign direct investment or portfolio flows. That is why the SARB has to keep an eye on international developments such as the raising of interest rates in the United States, as that may lead foreign investors to switch funds from South Africa to other markets, where they perceive there is a better risk return proposition.
In 2015, net capital inflows only covered 3.6 percent of GDP compared with a current account deficit of 4.4 percent, so the SARB’s gross foreign reserves fell from $49.1 billion at the end of December 2014 to $45.1 billion at the end of January 2016.
As things stand, ratings agency Moody’s will visit South Africa next week to decide whether to downgrade the credit status of the country to just one notch above sub-investment grade. The South African Treasury said in a statement that the “review visit will primarily serve to either affirm the current ratings or downgrade them.”
Moody’s said on Tuesday that it was placing South Africa’s Baa2 ratings on review for downgrade, citing the economy’s weak growth prospects and worsening fiscal position.