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SA’s current account switches to deficit, exposing the rand’s vulnerability

SA’s current account switches to deficit, exposing the rand’s vulnerability
Ed Stoddard
By Ed Stoddard
12 Mar 2023
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The widening deficit, a narrowing in the trade surplus and a deterioration in the country’s terms of trade are helping to erode a key base of support for South Africa’s currency.

One reason the rand is so vulnerable at the moment was revealed on Thursday by the South African Reserve Bank (SARB) in its quarterly breakdown of the balance of payments.

The data showed that SA’s current account of its balance of payments fell into a deficit of R174-billion in the fourth quarter (Q4) of 2022, equal to 2.6% of gross domestic product, from a revised and wafer-thin surplus of R3.1-billion in Q3.

The current account is a key part of a country’s balance of payments and is basically an accounting of its transactions with the rest of the global economy. The widening deficit implies increased external debt, which is not a good thing.

“On an annual basis, the balance of the current account switched to a deficit of R31.8-billion (0.5% of GDP) in 2022 from a surplus of R228-billion (3.7% of GDP) in 2021 – the first annual deficit since 2019,” the SARB said.

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South Africa’s terms of trade (TOT), a ratio between export and import prices, also deteriorated further over that period, falling to 104.6 from 110.6. This means it’s still in the black: when more capital is flowing into a country than flowing out, the TOT is more than 100, and when it is less than 100, it means more capital is leaving.

But the trend is going the wrong way, as is the trade balance.

“South Africa’s trade surplus narrowed from R249-billion in Q3 2022 to R12.2-­billion in Q4 2022 as the value of merchandise imports increased while that of goods exports declined,” the SARB said. 

That’s a pretty stout narrowing. Taken together, these trends are eroding a key base of support for the rand. SA’s record current account surplus in 2021 and healthy trade surpluses and TOT ratios, which were largely a consequence of record prices for the commodities South Africa produces and exports, gave the rand a prop to stand on.

That prop is now evaporating and, for the rand, there is often a lag time between this deterioration and its decline, which began in earnest at the start of this year. On 31 December 2022, the rand was fetching around 17.02 to the dollar. Over two months later, on Friday night, it was around 18.60 to the dollar, about 9% weaker in the year to date, and is flirting with a run to its record low of 19.03 to the dollar.

Shrinking economy


Its latest wobbles have been triggered by the continued onslaught of rolling blackouts on an epic scale and data this past week that showed the economy contracted in Q4 2022 by 1.3% on a quarterly basis, a far ­bigger shrinkage than the 0.4% expected by the market.

Hawkish comments from the US Federal Reserve that signalled it was planning to keep hiking rates to curb inflation dealt another blow to the currency.

But if the current account and trade balance and TOT were all on firmer ground, the rand would not be so vulnerable.

And it’s not just commodity prices that are at play here.

“...[E]xport potential was hindered in Q4 2022 by persistent domestic challenges, including load shedding and logistical ­bottlenecks. Logistical impediments were particularly prevalent in October with the onset of Transnet’s industrial action, compelling Transnet Port Terminals to declare a force majeure,” Investec economist Lara Hodes said in a note on the data.

The Minerals Council South Africa estimates that rail and port constraints cost the mining sector R50-billion in 2022 in lost bulk commodity exports such as coal and iron ore. That negatively affects the numbers outlined above and is a loss to GDP and the income of mining companies. None of this is good for the rand, investor sentiment or the wider economy.

“The outlook for 2023 is bleaker compared with previous years, commodity price tailwinds are fading and exporters struggle to get their goods to and through domestic ports. South Africa’s external position is expected to deteriorate this year,” said Jee-A van der Linde, a senior economist at Oxford Economics Africa.

The bottom line is that the rand, and the economy in general, have little going for them right now.

Indeed, SA’s economy is almost certainly contracting again this quarter, which means it is in recession. That will only end when the economy starts growing again, and there is little prospect of that at the moment. DM168

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