CA widens to 6.2% of GDP

Trade and income accounts deteriorate, as expected

As expected the current account deficit widened in Q2 compared with Q1. The extent of the widening, from -4.5% of GDP in Q1 to -6.2% of GDP in Q2, was greater than consensus expectations of 5.5%, but was in line with our expectation of 6.0%. The USDZAR sold off over 1.17% post the data release.

Despite better global growth in Q2 versus Q1, South Africa’s trade balance deteriorated markedly, as a result of what the SARB refers to in the bulletin as ‘structural impediments’, as well as lower commodity prices, retooling at the Mercedes-Benz factory and strikes in the PGM sector.

Looking ahead, we expect the current account to narrow to 5.9% of GDP in Q3. While this would be an improvement it will keep the Rand vulnerable to global sentiment, and provides motivation for our expectation of a further 25bps increase in the repo rate.

The trade deficit widened by R26.3Bn, from R75Bn in Q1 to R101Bn (saar).

Exports are not responding to the weaker currency and fell 3.0%q/q in volume terms and 1.7%q/q in value (fig 5).
Fortunately imports are responding to the weaker currency and despite the increase in the average price of Brent, from $108.24 per barrel in Q1 to $109.9 in Q2, imports fell 0.9%q/q in value terms and 1.4%q/q in volume terms (fig 5).
Interestingly, the terms of trade moved sideways in Q2:14, reflecting that the deterioration in export commodity prices was mitigated by lower import prices, despite the rise in the average price of Brent (fig 4).
The net services, income and current-transfers account widened R35Bn, from R86Bn in Q1 to 121Bn (saar) in Q2, due to deterioration in both the net income and net current-transfer balances (fig 7). Income receipts fell due to a reduction in dividend receipts; South Africa received R42Bn worth of total dividend inflows in Q1, which was R27Bn less than the windfall R69Bn received in Q1.
Encouragingly, the financial account increased as a % of GDP, from 4.5% (R39Bn) in Q1, to 4.8% (R43.2Bn) in Q2 (fig 14). This was due to:

A tripling of FDI inflows, from R8Bn to R24.6Bn alongside a more moderate increase in outflows from R5.4Bn to R12.7Bn. According to the SARB, inflows reflected loan finance extended to domestic subsidiaries in manufacturing and telecommunications.
A more than doubling of portfolio inflows, from R12.3Bn to R27.4Bn. Foreigners favoured bonds over equities. Portfolio inflows were comprised of R18.1Bn of bond purchases and R9.3Bn of equity purchases.

Other investment inflows, which fell significantly from R37.9Bn to R4.7Bn. According to the SARB, this reduction can be attributed to the redemption of maturing loans to the banking sector as well as foreign currency denominated loan repayments.

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