Current account deficit widens even further in the fourth quarter

SA’s current account deficit widened notably in the last quarter of 2023, largely driven by a sharp deterioration in the trade surplus and a higher shortfall on the services, income and current transfers.

The deficit reflects the effect of subdued global demand and lower commodity prices on export volumes and prices.

Reserve Bank data released on Thursday showed SA’s current account deficit rose sharply to R165.5 bn in the fourth quarter, from an upwardly revised R34.4 bn in the previous period and worse than market forecasts of a R92 bn shortfall.

As a ratio of GDP, this translates to a deficit of 2.3%, a deterioration from the 0.5% deficit recorded in the previous quarter. For the full year, the current account deficit widened to 1.6% from 0.5% in 2022.

As export commodity prices have weakened and infrastructure constraints have intensified, SA’s current account surpluses in 2020 and 2021 have given way to deficits. The current account has now recorded deficits for seven consecutive quarters, with quarterly data showing a much higher degree of volatility than usual.

Commodity price tailwinds have faded and external conditions are much less favourable than they were in 2021, when the country recorded a current account surplus of 3.7% of GDP.

Nedbank economist Liandra da Silva said the current account deterioration was expected to continue in 2024 for at least the first half as economic conditions remained subdued.

The trade account was volatile throughout 2023, reflecting the uncertainty in both domestic and global environments. Trade performance will remain contained by subdued global demand and lower commodity prices, which will weigh on export volumes and prices.

The current account is the broadest measure of trade in goods and services, and a deficit indicates that SA’s external funding needs are growing. The current account is one half of the balance of payments, the other half being the capital account.

While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures imports and exports of goods and services, payments to foreign holders of a country’s investments, payments received from investments abroad and transfers such as foreign aid and remittances.

The trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit.

As a relatively small and open economy, SA is predisposed to the global environment, which remains uncertain.

While the US economy has exhibited signs of relative resilience despite a series of increases in interest rates, the post-Covid recovery in China remains patchy. China is SA’s biggest trading partner, followed by the US.

Bank data shows the trade surplus narrowed to R88.1 bn in the fourth quarter from R181.1 bn in the third quarter, with imports growing faster than exports. Imports of crude oil and refined petroleum products increased the most. Exports of fruit and manufacturing products increased but sales of pearls, precious and semi-precious stones declined.

The services, income and current transfer shortfall widened to R253.7 bn in the fourth quarter from R215.4 bn, primarily due to a larger deficit in the primary income account.

Da Silva said Nedbank expected trade conditions to recover in the second half of the year as monetary policy easing bolstered demand.

“However, domestic structural inefficiencies will continue to place a lid on export volumes.

DOMESTIC STRUCTURAL INEFFICIENCIES WILL CONTINUE TO PLACE A LID ON EXPORT VOLUMES

“The income account deficit should narrow as bleak corporate earnings prospects limit dividend payments, though higher Southern African Customs Union payments — as announced in the national budget 2024 — will provide some upside pressure,” she said. “The deficit on the services account will narrow as global travel continues to edge closer to pre-pandemic levels.”

Absa said looking at 2024 and beyond it expected the current account deficit to widen, partly reflecting continued deterioration in terms of trade.