Balance of trade blow for the country

Swing from R20.7bn surplus to R91.5bn deficit to intensify government’s fiscal woes

SOUTH Africa’s finances deteriorated further in the second quarter as the current account swung from a surplus in the prior quarter to a deficit, with Moody’s warning that the recent economic downturn would intensify the government’s fiscal woes, particularly its ability to generate the required revenue.

The South African Reserve Bank (SARB) yesterday said that the country’s balance of trade halved from a surplus of R20.7 billion in the first quarter to a deficit of R91.5bn in the second quarter.

SARB said the current account balance as a ratio of gross domestic product ( GDP) fell to a 2.4 percent deficit from a surplus of 1.2 percent in the first.

The widening deficit comes just hours after Statistics SA (StatsSA) said that the country’s GDP contracted an annualised 51 percent during the second quarter of this year, or 16.4 percent quarter-on-quarter on Covid-19 restrictions.

StatsSA said that the contraction was the first conservative quarterly shrinking of the economy.

Yesterday, Moody’s said it could take up to three years for the economy to recover from the deep recession as persistent energy insecurity would weaken investor confidence, despite the recent lifting of lockdown restrictions.

The rating agency said the gradual easing of the Covid-19 lockdown would support a recovery in economic activity in the second half of 2020, but weak consumer and investor confidence, and the renewed load shedding, would still lead to a 4.2 percent contraction.

“As a result, we maintain our expectation for a 6.5 percent recession for the full year. We expect the recovery will persist through 2021 and support growth of 4.5 percent,” Moody’s said.

“However, the South African economy will not return to the 2019 levels of economic activity until 2023”.

Moody’s said the revenue shortfall would further complicate the supplementary Budget’s target debt stabilisation by 2023.

It said the loss in revenue would be much more severe than the fall in economic activity.

Though Moody’s steered clear from issuing any warning of a possible downgrade on deteriorating financial challenges, it warned that the prevailing economic environment would impact on banking assets.

It said the economic shock would trigger a deterioration in asset quality that will erode the buffers of South Africa banks, which were very strong pre-crisis.

Citadel’s chief economist Maarten Ackerman said Moody’s would likely wait to see how the government proposes to curb spending during the medium-term budget next month.

Ackerman said that Moody’s might overlook the second quarter’s dismal performance as it was specific to a quarter affected by a global pandemic.