BMI View: South Africa's current account deficit will remain sizeable over the coming years, with BMI predicting that it will be 6.7% of GDP in both 2013 and 2014. Inflows to the capital and financial account have propped up the balance of payments in recent years, but with investor appetite for South African bonds and equities waning, this trend can no longer be assured.
The latest data reinforce our view that South Africa's current account deficit will remain wide, posing a notable but not critical risk to macroeconomic stability. In Q113, the deficit stood at 5.8% of GDP, down from the 6.5% recorded in Q412, but substantially above the 2.0-4.0% range recorded over 2009-2011. The widening of the shortfall witnessed during 2012 was due to weak export growth, robust import demand and an increase in the deficits on the income and current transfers accounts.
Over the medium term, we see a continuation of these trends, forecasting a current account deficit of 6.7% of GDP in both 2013 and 014, following the 6.3% recorded in 2012. Moreover, we highlight the strong risk that inflows to the capital and financial account will wane due to subdued investor appetite for emerging market assets, and therefore be insufficient to cover the current account deficit. However, although this may result in foreign reserves being drawn down, we do not believe the balance of payments will become a critical weakness in South Africa's macroeconomic profile.
|Deep In Deficit|
|South Africa - Current Account By Component, ZARbn|
Focusing on the outlook for exports, we are forecasting a rebound in nominal growth to 7.0% in 2013 (in rand terms), following an increase of just 2.8% in 2012 when gold, platinum and coal production were severely hampered by industrial unrest. Although we expect sporadic strikes and protests to continue, our core view is that industrial unrest will not occur on the same scale as that seen in the aftermath of the August 2012 Marikana Massacre. As regards the external environment, we are fairly positive on the US, forecasting real GDP growth of 2.1% in 2013, but we are concerned about China, believing that the current spike in interbank rates is a precursor to a sharp downturn in economic activity. Although we expect commodity prices to remain under pressure amid the slowdown in China, we nevertheless expect production of two of South Africa's key commodities to edge upward. BMI's mining analysts are forecasting that gold output will rise by 1.1% in 2013 to 5.7 million ounces and coal production will rise by 2.2% to 259 million tonnes, while platinum output will continue to decline, falling by 1.2% to 4.5moz.
|Concerns About China|
|South Africa - Exports By Destination, ZARbn|
Turning to imports, these have been growing strongly since 2010 and demand remains high in spite of the relative weakness of the rand. This ties in with the data on GDP by expenditure, which shows that consumer demand continues to grow, albeit at a slower pace than that recorded over 2010-2011. Notwithstanding an expected slowdown in investment growth following the Marikana Massacre, we are forecasting nominal growth of 9.0% (in rand terms) for imports in 2013 and 8.5% in 2014, following a 15.4% expansion in 2012. We see total import growth coming in lower in 2013 than 2012 because the recent sharp depreciation of the South African rand will keep the price of imported goods relatively high in local currency terms, putting the brakes on growth.
|South Africa - Capital & Financial Account By Component, ZARbn|
Given the size of the current account deficits we are forecasting, inflows to the capital and financial account will be crucial for propping up South Africa's balance of payments. The latest data are somewhat concerning in this regard: in Q113, net portfolio inflows were negative. Moreover, global investor sentiment has turned sharply in recent weeks and months, exhibiting an aversion towards emerging market assets - which is a concerning development for South Africa given the high degree of foreign ownership of bonds in particular. Given this trend, plus the uncertainties in the domestic political and economic environment, our core scenario is that capital and financial account inflows will be subdued over the coming quarters, resulting in a notable weakening of South Africa's balance of payments position.
|Notes: f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 South African Reserve Bank/BMI calculations.|
|Goods imports, US$bn 2||65.8||81.7||100.5||102.7||96.9||97.2||115.1||139.3||158.2|
|Goods imports, % of GDP 2||23.0||22.5||25.0||26.7||27.1||26.9||26.3||26.1||26.4|
|Goods exports, US$bn 2||66.1||85.4||102.8||93.5||86.6||86.7||103.8||126.2||142.4|
|Goods exports, % of GDP 2||23.1||23.5||25.6||24.3||24.3||24.0||23.7||23.6||23.7|
|Goods exports, % of imports 2||100.4||104.5||102.2||91.0||89.4||89.2||90.1||90.6||90.0|
|Balance of trade in goods, US$bn 2||0.3||3.7||2.3||-9.2||-10.3||-10.5||-11.4||-13.1||-15.8|
|Balance of trade in goods, % of GDP 2||0.1||1.0||0.6||-2.4||-2.9||-2.9||-2.6||-2.5||-2.6|
|Services imports, US$bn 2||14.7||18.4||19.6||17.7||16.1||15.6||18.1||21.3||23.1|
|Services imports, % of GDP 2||5.2||5.1||4.9||4.6||4.5||4.3||4.1||4.0||3.9|
|Services exports, US$bn 2||12.0||14.0||14.8||15.1||13.8||13.5||15.8||18.8||20.6|
|Services exports, % of GDP 2||4.2||3.8||3.7||3.9||3.9||3.7||3.6||3.5||3.4|
|Goods and services exports, US$bn 2||78.1||99.4||117.6||108.6||100.4||100.2||119.6||145.0||163.0|
|Goods and services exports, % of GDP 2||27.3||27.4||29.3||28.3||28.1||27.7||27.3||27.1||27.2|
|Balance of trade in goods and services, US$bn 2||-2.5||-0.7||-2.5||-11.7||-12.6||-12.6||-13.7||-15.6||-18.4|
|Balance of trade in goods and services, % of GDP 2||-0.9||-0.2||-0.6||-3.0||-3.5||-3.5||-3.1||-2.9||-3.1|
|Income account balance, US$bn 2||-6.4||-7.2||-9.2||-8.5||-8.0||-8.1||-9.7||-11.8||-13.2|
|Income account balance, % of GDP 2||-2.2||-2.0||-2.3||-2.2||-2.2||-2.2||-2.2||-2.2||-2.2|
|Net transfers, US$bn 2||-22.4||-16.8||-14.2||-31.4||-32.9||-34.6||-36.3||-38.1||-40.0|
|Net transfers, % of GDP 2||-7.8||-4.6||-3.5||-8.2||-9.2||-9.6||-8.3||-7.1||-6.7|
|Current account balance, US$bn 2||-11.5||-10.2||-13.6||-24.1||-24.1||-24.1||-27.3||-32.0||-36.5|
|Current account balance, % of GDP 2||-4.0||-2.8||-3.4||-6.3||-6.7||-6.7||-6.2||-6.0||-6.1|
|Openness to international trade, % 1,2||46.2||46.0||50.6||51.0||51.4||50.9||50.0||49.7||50.1|