BUSINESS MAVERICK

South Africa’s current account surplus a green shoot in an arid economic landscape

By Ed Stoddard 11 March 2021
Caption
An employee counts mixed denomination rands at the Forex department inside a bank branch in Johannesburg. The National Treasury has, since 1955, slowly unwound the tangled web of legislation that governs South Africa’s exchange control regulations. (Photo: Nadine Hutton/Bloomberg via Getty Images)

South Africa’s current account surplus narrowed in the fourth quarter of 2020, but remains robust. This is partly a reflection of surging prices for key export commodities such as gold and platinum group metals, and depressed oil prices in the period under review. This is supportive of the rand, but other data out this week is grim.

South Africa’s current account balance surplus shrank in the fourth quarter (Q4) of 2020 to 3.7% of gross domestic product (GDP) from 5.9% in the previous quarter, the South African Reserve Bank (SARB) said on Thursday, 11 March. 

At R197.8-billion, the surplus remains hefty and is the second-biggest recorded after the one posted in Q3 of 2020. The trade balance is a healthy R425.2-billion. South Africa’s terms of trade are also in good nick at the moment. 

“South Africa’s terms of trade (including gold) improved further in the fourth quarter of 2020 as the rand price of exports of goods and services increased more than that of imports,” the SARB said. 

This latter trend appears to have been maintained in the first month of 2021. Statistics South Africa (StatsSA) data on Thursday showed that mineral sales leapt almost 25% year on year in January. Gold sales lead the way, surging 71.6%. Precious metals prices were on a tear in 2020 that extended into January, though gold has cooled a bit of late.

In a nutshell, the current account balance is a record of a country’s transactions with the wider global economy. The terms of trade is a ratio between export and import prices, with a reading above 100 indicating that the amount of capital flowing into the country via exports is higher than that leaving its shores in expenditure on imports. South Africa’s reading in Q4 2020 was 119.7. 

This in turn is supportive of the domestic currency and helps to explain the rand’s relative robustness last year. Of course, a strong rand can also make South African exports less competitive and this state of affairs can be eroded. It’s also the case that declining imports can be a reflection of subdued domestic demand, and so the trade surplus can give a misleading picture of economic strength. 

Rising oil prices, among other factors, could see a further narrowing of both the current account and the terms of trade. 

“… in the context of an economy that is reopening, and higher oil prices globally, some further narrowing of this surplus seems inevitable,” Razia Khan, chief Africa economist at Standard Chartered Bank, told Business Maverick

Still, overall, this can be viewed as a green shoot in an arid economic landscape. Other data this week suggests the roots of recovery still need some watering. 

While mineral sales remain positive, mining production remains in decline. 

The StatsSA data revealed that mining production fell 6.2% year on year in January, while manufacturing production declined 3.4% on an annual basis in the same month. The RMB/BER BCI declined to 35 in the first quarter of 2021, from 40 in the previous quarter, which is deeply negative as 50 is the neutral mark. 

Seven out of 10 senior executives surveyed for the index expressed dissatisfaction with prevailing business conditions. That is hardly conducive to new investment. 

“Beyond 2021, the strength of recovery will depend on the structural reforms that are put in place. The tourism measures and visa reforms should yield significant results for the services sector. 

“While the electricity constraint will not be resolved any time soon, the broadening of South Africa’s energy mix is a long-term positive. Investment remains key to the outlook. 

“While positive in Q4 2020, sustained private sector confidence is needed to make a difference,” Khan said. BM

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