Economy

Current account, investment improve

4 September 2009

South Africa's accounts with the rest of the world improved dramatically in the second quarter as shrinking economic activity led to a decline in imports, while foreign investment in the country picked up, the SA Reserve Bank said on Thursday.

According to the Bank's latest quarterly bulletin, South Africa's current account deficit – the gap between revenue on exports of goods and services and the country's import bill – fell from 7% of gross domestic product (GDP) in the first quarter to 3.2% in the second quarter.

'Window of opportunity'

Business Report noted on Friday that this is SA's lowest current account deficit since the first quarter of 2004, and "close to the 3% benchmark economists consider acceptable".

The current account deficit has been seen as the "Achilles heel" of South Africa's economy, as it makes the country dependent on foreign investment in stocks and bonds in order to fund its import bill.

Business Report argues further that, while the improvement in the country's external account reflects weak local economic conditions, "it provides a window of opportunity for businesses making long-term plans.

"By stabilising the rand, it creates space for companies to plan new infrastructure projects in anticipation of a recovery next year. A high current account deficit is a constant threat to the rand, and importers of capital goods face the possibility that the currency will move against them by the time they have to pay the bill."

Imports shrink

The Reserve Bank reported that both components of the current account deficit improved in the second quarter, with the balance in trade of goods shifting to a surplus for first time since the third quarter of 2005, and the deficit on the services account also shranking, from R110.3-billion to R99.7-billion.

The trade balance moved from a deficit of R53.2-billion in the first quarter to a surplus of R26.6-billion in the second quarter as imports shrank for the third quarter running, declining by 15.5% in the second quarter.

The Bank noted that imports of cars, machinery and electrical equipment fell especially strongly, while merchandise imports also fell.

Investment picks up

The Bank said that investment picked up in the second quarter. South Africa recorded a substantial foreign direct investment inflow of R23.9-billion in the second quarter – boosted by Vodafone's purchase of an additional 15% stake in Vodacom – compared with an R11.7-billion capital inflow in the first quarter.

There was also an increase in foreign portfolio investment, as foreigners bought R29-billion worth of South African stocks and bonds in the second quarter, up from R10.1-billion in the first quarter. This was boosted by the government's sale of a US$1.5-billion global bond in the second quarter.

Savings improves

On savings, the Banks reported that the country's gross savings as a percentage of GDP rose from a low 15% in the third quarter of 2008 to 16.5% in the second quarter of 2009.

"The improvement in the saving performance can be attributed to stronger growth in the gross saving of the private sector relative to gross domestic product," the Bank said in a statement.

"A lack of business and consumer confidence, a reduction in household wealth due to the collapse in asset prices, and subdued economic conditions partly explained the lower spending on consumer and capital goods."

SAinfo reporter