South Africa's current account is in great shape — here's what that means
- South Africa is on track for its first annual current account surplus in many years.
- The current account records South Africa’s transactions with the rest of the world, and is an indication of whether more money flowed into the country, than out.
- A sustained current account surplus is good news for the rand, inflation and interest rates.
- For more articles, go to www.BusinessInsider.co.za.
South Africa just posted a bumper current account surplus for the third quarter. The current account records South Africa’s transactions with the rest of the world, and is an indication of whether more money flowed into the country, than out.
The current account measures all sorts of money flows, including imports and exports, as well as other cross-border payments, like dividends and interest payments, as well as foreign aid.
For decades, South Africa posted large deficits. That’s in part because we import most of our oil, and huge amounts in interest and dividends are paid to foreigners outside the country.
But in the third quarter, South Africa posted a current account surplus of R297.5 billion. This is more than four times the size of the previous largest surplus, recorded in the first quarter of 2020, says the Reserve Bank.
This is partly because of strong exports – South Africa’s trade surplus (exports minus imports) hit R453.6 billion in the third quarter. South Africa is enjoying a brilliant export year. A record high gold price has helped, as well as bumper agricultural exports. For example, maize exports increased by 235% to 963,441 tons in the third quarter, while South Africa may export almost 10 billion pieces of citrus fruit this year, one of the best seasons on record. This helped to counteract lower vehicle exports.
Massive trade surplus in third quarter of almost R300 bn, biggest in 40 years. Will end year in a record surplus I would think. Another reason for strong rand— Wayne McCurrie (@WayneMcCurrie) December 10, 2020
The trade surplus was also helped by the much lower oil price, which meant less money had to flow out to pay for the fuel. In addition, because of the depressed state of the SA economy, imports have been weak – companies are hesitant to import machinery and other expensive goods.
What also contributed to the current account surplus was a drop in the dividend and interest payments to foreigner investors who hold South African shares and bonds.
Because foreigners have been selling off so much shares and bonds, dividend and interest transfers have declined, says Old Mutual's head of economic research Johann Els. So far this year, foreign investors have sold almost R140.5 billion more in South African shares that they have bought – and almost R60 billion more in bonds.
South Africa is on track to record a current account surplus for the whole of 2020, predicts Els. This will be the first time in almost three decades that the country managed to achieve a sustained current account surplus.
What does this mean for South Africans?
A sustainable current account surplus usually indicates that the rand will remain stable or strengthen, says Els. If more money flows out of, than into, a country – it’s bad for the value of a currency.
And a stable rand means that inflation will probably also remain stable, which means interest rates may not be hiked.
Is the current account surplus sustainable?
No, says Els.
Foreign investors are starting to regain their appetite for investments in emerging markets, like South Africa.
For many months, investors have been fretting about the coronavirus pandemic and its impact on the world economy. They have been very risk averse – choosing to buy “safe” investments like gold, US bonds and the dollar. But recent good news about Covid-19 vaccines has boosted confidence that the worst of the crisis might be over. Their risk appetite has increased and emerging markets are back on the menu.
Els expects more buying of South African bonds and shares in coming months, which will increase dividend and interest payments next year.
Stronger growth is also expected next year, which should mean a bigger demand for imports. Government’s infrastructure drive could also demand bigger import of machinery and other equipment. This means South Africa may not export more than it imports next year – which will probably bring a return of the current account deficit.
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