SA trade deficit at worrying levels

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By Kevin Lings

In February 2008, South Africa’s trade account recorded another deficit of R5.8bn. The market was expecting a deficit of around R4bn, although the trade balance is notoriously difficult to forecast. During February 2008 exports rose by a very substantial 19.3% m/m, but imports also rose by a significant 6.4% m/m. The increase in exports was relatively broad-based and included a R2.8bn rise in vehicle exports as well as a R1.8bn increase in exports of machinery and equipment. On the import side, there was a R1.5bn increase in oil imports as well as a R1.5bn rise in imports of machinery and equipment. The cumulative trade deficit for 2008 as a whole was R16.0 billion versus a deficit of R12.3 billion during 2007.

The monthly trade data are very erratic and therefore it is important to review the trade account on a trend basis. Over the past 12 months the trade balance has averaged a monthly deficit of R6.1bn compared with an average deficit of R5.7bn in 2007 and R5.6bn in 2006. Normally the trade balance is better in the first half of the year than the second half.

The trade account has recorded a deficit in each of the last 14 months and in 25 out of the last 26 months. Importantly, there are signs that consumer activity is slowing (especially motor vehicle purchases) and that fixed investment spending will not experience as much growth as last year. This should be reflected in a modest improvement in the trade balance in 2008. However, SA’s current account deficit remains substantial. In Q4 2007 South Africa recorded a current account deficit equivalent to 7.5% of GDP; the services account equated to a deficit of a massive 6.2% of GDP, while the net dividend outflows amounted to 2.6% of GDP!

All of this raises significant concerns about the potential for further currency weakness, especially when one considers that South Africa’s credit risk spread has widened appreciably in recent months. The increased capital flows to South Africa in recent years have really been part of a dramatic increase in developed-market capital flows to emerging markets. These flows not only reflect the global search for yield, but also the improving economic fundamentals within most emerging markets. These include higher sustained growth, ongoing fiscal discipline and fiscal credibility, undervalued exchange rates, managed inflation rates, low foreign debt, improved credit ratings and a generally more friendly business environment. Unfortunately, for SA many of these fundamentals have deteriorated somewhat in recent months. We expect this deterioration to be temporary, but it certainly increases the vulnerability of the rand considering the current political uncertainty, electricity disruptions to key industries such as mining, as well as the increased global risk aversion on the back of the US financial crisis and economic slowdown.






Source: Kevin Lings, Stanlib, March 31, 2008.

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