SARB QB update: Current account deficit widens to 2.4% of GDP in Q2.17 from 2.0% on a rise in the service, income and transfers deficit

13 Sep 2017

Annabel Bishop

Chief Economist

Figure 1: Balance of payments: current account
  • The current account deficit increased to R110bn in Q2.17 from R91bn in Q1.17. Expressed as a percentage of GDP, the deficit widened to 2.4% from 2.0%. The outcome contrasts with market expectations of a narrowing in the deficit to 1.9% of GDP. 
  • The widening occurred primarily on account of an increase in the net service, income and current transfer payments deficit to R175bn from R149bn in the prior quarter, or to 3.8% of GDP from 3.3% of GDP. 
  • The deficits on all three of these components increased in Q2.17, with the largest in net current transfer payments. Specifically, the current transfers deficit rose to R44bn in Q2.17 from R29bn in Q1.17 on “an increase in the amount paid to South Africa’s trading-partner countries in the Southern African Customs Union at the commencement of the 2017/18 fiscal year”, according to the SARB.
  • The net income payments deficit rose to R124bn from R116bn in Q1.17, as the drop in dividend receipts from abroad exceeded the decline in dividend payments to non-resident investors. 
  • In the quarters ahead, payments linked to portfolio investment by non-residents are likely to remain elevated as portfolio investment totalled R101bn in H1.17 compared to R83bn in H1.16. The SARB noted that the increase has been “driven by a search for yield in emerging markets, including South Africa” with the bulk of foreign interest in debt securities and “to a lesser extent, equity securities”. 
  • The widening in the services deficit from R4bn to R7bn was accounted for by “increased payments of a technical nature in the category ‘other services’.”
  • In Q2.17, the trade surplus increased to R65bn from R57bn in Q1.17 which translated to 1.4% of GDP versus 1.3% of GDP previously. 
  • In terms of trade developments, export growth has consistently exceed import growth since Q2.16. Aggregate global demand conditions and commodity prices have strengthened, aiding SA’s export performance whilst weak domestic consumption and investment demand have compressed import growth.  
  • These trade dynamics are expected to persist in the coming quarters as high frequency global indicators, such as PMIs and global trade, confirm the strengthening of the global synchronised recovery. On the domestic front, import growth is expected to remain suppressed amid depressed consumer and business confidence and the economy is not expected to record more than 0.5% y/y growth in 2017. 
Figure 2: Balance of payments on current account (R’bn seasonally adjusted and annualised)
Figure 3: Real disposable income and consumption expenditure
  • The SARB’s Quarterly Bulletin also provides insight into household sector, in elaboration of the earlier release of the Q2.17 GDP figures by Stats SA.
  • Household consumption expenditure growth rebounded to 4.7% qqsaa from a 2.7% qqsaa decline in Q1.17.
  • In Q2.17, the growth in household spending on durable, semi-durable and non-durable goods increased whilst expenditure on services contracted. 
  • Providing support to consumer spending in Q2.17 will have been the recovery in real disposable income of households from -2.1% in Q1.17 to 4.5% in Q2.17. The SARB notes that the “level of real compensation of employees increased.” This will have partly been a function of the moderation in CPI inflation to 5.3% y/y in Q2.17 from 6.3% y/y in Q1.17. 
  • The measure of household indebtedness declined slightly in Q2.17, with the ratio of household debt to disposable income at 72.6% versus 73.0% in Q1.17. 
  • Despite this decline, household indebtedness remains historically elevated. This, coupled with particularly modest credit extension, weak job prospects in both government and the private sector and depressed consumer confidence are likely to weigh on consumer spending this year. We project household consumption expenditure at 1.0% y/y in 2017 compared to 0.8% growth in 2016.
  • After expanding for two consecutive quarters, gross fixed capital formation declined by 2.6% qqsaa in Q2.17 on account of a contraction in private sector investment, which comprises two-thirds of total investment. The 6.9% qqsaa decline in private sector investment and the 3.1% qqsaa fall in investment by public corporations outweighed the effect of the 12.4% qqsaa increase by general government. 
  • The SARB assessed that “(f)ixed capital formation by the private sector was deterred by subdued domestic demand, ample capacity in some parts of the domestic economy, ongoing political uncertainty, and weak business confidence.”
  • Fixed investment by public corporations contracted for the fourth consecutive quarter, partly as a function of postponed capital projects. Fixed investment by general government continued to be supported by road maintenance and infrastructure.
Figure 4: Private fixed investment and business confidence