Trouble ahead for South Africa’s economy

·9 Jun 2023

Absa says South Africa’s better-than-expected current account deficit for Q1 2023 will be short-lived.

The deficit in the current account, a wide measure for trade in goods and services, dropped to an annualised 1% of GDP, from a revised 2.3% from the prior quarter.

This was far better than Absa’s (2.2%) and Thomson Reuters’ (2.7%) predictions. Moreover, 12 economists surveyed by Bloomberg predicted a median 2.8% gap.

The better-than-expected deficit was mainly driven by the widening of the annualised trade surplus from R34.2 billion in Q4 2022 to R103.2 billion in Q1 2023, with the value of goal exports increasing a nine-quarter high.

Absa said the boost mainly came from merchandise trade, which grew from 0.5% in Q4 2022 to 1.5% of GDP in 2023. This led to a 6.5% quarter-on-quarter increase in the value of merchandise exports, reflecting a ‘once-off’ normalisation in Transnet’s operations.

In addition, the volume of exports for both goods and services rebounded by 4.2% quarter-on-quarter after falling by 3.3% in Q4 2022.

Although merchandise imports rose by 3.0% quarter-on-quarter, this was offset by the stronger growth in merchandise exports.

Meanwhile, the deficit in net service receipts, income payments and current transfers also grew by 0.3 percentage points to 2.5% of GDP, driven primarily by a better balance in net service receipts.

However, Absa said that the various economic headwinds facing South Africa would likely lead to the widening of the current account deficit.

South Africa’s terms of trade have continued to worsen from a global perspective.

The rand-denominated export commodity price index for South Africa is down 4.6% in Q2 2023 and is down 12.5% since the start of 2023.

Persistent infrastructure bottlenecks, from electricity shortages to rail operation failures, will also continue to contain export volume growth.

Although private sector investment in renewable energy projects is growing and will likely lift imports of capital goods, these projects will only have an effect in future quarters.

Against the difficult economic environment, Absa says the current account deficit will likely rise to 2.3% of GDP in Q2 2023.

This will then worsen to 2.5% in Q4 23 and 2.7% in 2024.