SA deficit affected by strikes - Moody’s

File picture: Denis Farrell

File picture: Denis Farrell

Published Sep 16, 2014

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Johannesburg -

Strikes, sluggish global demand and declining commodity prices had affected South Africa's worsening current account deficit, credit ratings agency Moody's said on Monday.

“On September 9, the SA Reserve Bank released data showing that the country’s current account deficit reached a seasonally adjusted annualised rate of 6.2 percent of GDP in the second quarter,” senior vice-president Kristin Lindow said in a statement.

This was up from 4.5 percent in the first quarter.

The widening deficit increased the downside risks to South Africa’s external position and growth outlook, a credit negative.

“The increase in the current account deficit was greater than we had anticipated, even though we had expected a negative effect from platinum and manufacturing sector strikes,” Lindow said.

“Export performance was further affected by lower demand from trading partners in Asia and Europe and declines in the price of non-gold commodities.”

Although merchandise imports also declined, mainly because of weak domestic demand for equipment and vehicles, the decrease was not enough to offset the decline in exports.

This resulted in a trade deficit of 2.8 percent of gross domestic product (GDP) in the second quarter, up from 2.1 percent in the first quarter.

The deficit on South Africa’s services, income and current transfer accounts increased to 3.4 percent of GDP in the second quarter, from 2.4 percent in the first quarter.

It remained slightly below the long-term average of four percent of GDP.

“This reflects that the narrowing of the income deficit in the first quarter was mainly the result of non-recurrent large dividend inflows by South African corporates,” said Lindow.

This skewed the comparison between the two periods.

The second-quarter current account deficit was largely financed by portfolio flows and other transactions.

Unlike most other countries with elevated current account deficits, a large portion of South Africa’s deficit was usually financed by portfolio inflows denominated in rand.

This has allowed South Africa to maintain a relatively low exposure to foreign currency debt, less than 18 percent of GDP at the end of 2013.

This has mitigated the effect of the rand’s depreciation on the ability of the private and public sectors to service their foreign-currency liabilities.

“However, the reliance on portfolio flows makes South Africa more vulnerable to volatility in investor sentiment and risks putting more pressure on the exchange rate,” said Lindow.

This was especially so if current account deficits remained elevated in an environment of reduced quantitative easing from major central banks such as the US Federal Reserve. - Sapa

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