South Africa’s current-account deficit narrowed to 3.1 percent of gross domestic product in the second quarter after the nation’s exports received a boost from the lagged effect of last year’s rand weakness.
The gap on the current account, the broadest measure of trade in goods and services, narrowed from a revised 5.3 percent in the first quarter, the Reserve Bank said in its Quarterly Bulletin released on Tuesday in the capital, Pretoria. The median of 18 economist estimates compiled by Bloomberg was for a shortfall of 3 percent.
Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the deficit. While a narrower gap could support the rand, speculation that South Africa’s credit rating may be cut to junk status before the end of the year due to increased political uncertainty and sluggish growth may hinder inflows from abroad.
“Uncertainty is one the the main things that keeps capital away,” Elize Kruger, an economist at KADD Capital in Johannesburg, said by phone before the release of the data. “The fact that it feels like government is so busy sorting out their internal battles that they don’t focus on driving this economy forward, those sort of issues could hinder the capital that’s needed to finance” the current-account deficit, she said.
Higher Exports
The rand lost 26 percent of its value against the dollar last year, helping the trade balance to swing to a surplus of 33 billion rand ($2.3 billion) in the second quarter from a revised deficit of 48 billion rand. Export volumes increased by 5.6 percent and the value of merchandise shipments surged 9.1 percent to 1.1 trillion rand, boosted by the lagged effect of the weaker currency and stronger external demand, the central bank said. Import volumes fell by 0.9 percent due to weak growth in domestic demand, according to the report.
Foreign direct investment rose 9.7 billion rand and investment in South African stocks and bonds recorded a inflows of 33 billion rand compared with 13.5 billion rand in the first quarter.
“Capital inflows over the period were supported by indications of a possible delay in the tightening of monetary policy in the U.S. and the relatively high return offered on domestic debt securities,” the Reserve Bank said.
After gaining 14 percent since the start of the year, the rand has weakened almost 6 percent against the dollar since reports on Aug. 23 that Finance Minister Pravin Gordhan is being probed by police over allegations he set up an illicit investigative unit when he headed the national tax agency. The National Treasury has been at loggerheads with some state-owned companies over their governance and finances and two ruling-party politicians have suggested changes to the Reserve Bank’s jurisdiction.
Toward the end of August the rand “depreciated abruptly in the wake of domestic political events,” the Reserve Bank said. Increases in bond yields in May and late-August “were mainly related to negative perceptions arising from political developments in South Africa.”
Fitch Ratings Ltd. and S&P Global Ratings affirmedSouth Africa’s long-term foreign currency rating at BBB-, the lowest investment grade, in June and said the government must take decisive measures to boost growth, ease policy uncertainty and end political turmoil to avoid a future downgrade. The economy will probably expand at the slowest rate this year since a 2009 recession, according to the central bank.
The government forecasts the current-account shortfall will narrow to 4 percent of GDP this year from 4.3 percent in 2015.
