Shock Current Account Deficit Deals Blow To Rand

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8 September 2022 – South Africa’s current account unexpectedly swung to a deficit in the second quarter as imports outweighed exports and companies paid higher dividends.

The balance on the current account, the broadest measure of trade in goods and services, switched to an annualised deficit of 1.3% of gross domestic product, or R87 billion, from a revised 2.4% surplus in the previous quarter, the South African Reserve Bank said in a report on Thursday. Only one of 11 economists in a Bloomberg survey forecast a deficit to GDP.

The deficit was “largely due to higher dividend payments by companies with a direct investment relationship”, the bank said. “Direct investment relationship refers to entities where a single foreign direct investor owns 10% or more of the voting rights in that entity.”

The quarterly deficit is the first since the second quarter of 2020, the central bank said.

Key insights:

  • The unanticipated current account deficit may add to pressure on the rand, which has weakened 8% against the dollar this year as investors flock to the US currency on expectations of aggressive interest rate hikes by the Federal Reserve to quell surging inflation. The rand weakened by more than a percent following the data, hitting R17.37/$.
  • The negative balance was mainly driven by a shortfall on the services, income and current transfer account widening to R358 billion in the second quarter from R216 billion in the prior three months. The deficit as a ratio of GDP increased to 5.5% from a shortfall of 3.4% – the largest since the first quarter of 1986. The shortfall was largely driven by the nation’s primary-income account deficit, which reflects outflows due to dividends and interest payments to foreign shareholders widening to R250 billion in the quarter from R98 billion – the largest since at least 1960, according to central bank data.
  • The annualised trade surplus narrowed by more than a quarter to R272 billion, from R372 billion in the first quarter. That’s as the value of merchandise imports increased more than the value of goods exports.
  • The central bank in July forecast a current-account surplus of 2% of GDP for 2022 and 0.4% of GDP for 2023. Source: Fin 24