Catch-22 of trade surplus

There’s good news and bad news in the latest trade data, which show a higher-than-expected trade surplus of R5.94bn in August. This is the seventh consecutive month of surplus and the good news is that SA has now run a cumulative trade surplus of R43.5bn for the first eight months of 2017. That’s a big swing from the deficit of R13.7bn recorded over the same period a year ago.

The turnaround from deficit to surplus had already helped to narrow the deficit on the current account of the balance of payments, from 3.3% in 2016 into the 2% range in the first half of 2017, and the latest figures should continue that trend in the second half and into 2018, with economists predicting further improvements in the trade balance in 2018.

The current account is a broader measure than the trade balance, which includes cross-border payments for services as well as interest and dividend flows, but the trade balance is the big swing factor, so a surplus is helpful. That is particularly so given that the deficit on SA’s current account is a big source of vulnerability for the economy, making it dependent on foreign capital inflows, which can be volatile.

The latest trade figures are good news too because they reflect decent growth in SA’s exports, which were up 11% during the month of August and 15% year on year. A more buoyant global economy and improved commodity prices have helped exports and Nedbank’s economists say those conditions should persist.

SA’s export performance is still far below what it should be and the World Bank and others have pointed to the country’s failure to innovate and diversify its export base. But at least exports are showing some response to more favourable global conditions, and it is encouraging that agricultural exports have increased.

The trade surplus measures the gap between exports and imports and the import side has also helped to generate a surplus, with imports down 1.3% year on year in August even though they jumped in August because of higher oil imports, which had fallen in previous months. Stanlib economist Kevin Lings notes that imports have recorded an average annual decline of 1.8% over the past 12 months.

But the import decline is where the bad news meshes with the good. The falling imports mainly reflect an extremely weak economy, one in which consumers are not spending and, even more disturbingly, companies are not investing, with Reserve Bank figures showing investment declining quite sharply in the second quarter of 2017. That means demand for imported plant and equipment is down, so capacity is not being expanded and the economy is unlikely to be able to sustain higher growth rates over the longer term.

Remember too that customs duties make up a meaningful chunk of government revenue collection and it is in the fiscal space too that the decline in imports is likely to be bad news. Lings calculates that, over the past 12 months, import duties have declined by an annual average 9.9%, against the budget estimate that import duties would grow by 16%. That is one key reason why revenue-collection for the current fiscal year is likely to fall way short of February’s budget estimate, which means the deficit will come in significantly higher than projected – putting SA’s credit ratings at risk.

Lings calculates that although import duties represent only 4.5% and 5% of total tax revenue, the current undercollection means this category of tax revenue could contribute as much as R10bn of the estimated R40bn to R50bn revenue shortfall for the current 2017-18 fiscal year.

We will wait with trepidation for Finance Minister Malusi Gigaba’s medium-term budget on October 25 to see what he plans to do about revenue and growth.

A MORE BUOYANT GLOBAL ECONOMY AND IMPROVED COMMODITY PRICES HAVE HELPED EXPORTS