The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

SOUTH Africa’s current account deficit was slightly better than expected in the third quarter, remaining unchanged from the second quarter’s deficit of 6.4% (R202.5bn) of the country’s gross domestic product (GDP), the December quarterly bulletin of the Reserve Bank showed on Thursday.

A current account deficit occurs when a country’s imports of goods, services and transfers is greater than its exports in those areas. The current account deficit for 2011 as a whole was 3.3% of GDP.

The Bank noted that domestic production suffered from widespread industrial action during the third quarter, thereby contributing to South Africa’s lacklustre export performance.

A survey of seven leading economists had forecast a current account deficit of 6.5% of GDP. The forecast range varied from 6.1% to 6.8%.

The current account deficit in the third quarter was mainly driven by a large shortfall on the trade account, which was affected by weak global demand and local labour protests.

The shortfall on the trade account widened further to R82.3bn in the third quarter, from R75.7bn in the second.

The trade deficit was partly countered by a smaller deficit on the services, income and current transfer account with the rest of the world.

The shortfall on the services, income and current transfer account with the rest of the world narrowed by about 3% in the third quarter, culminating in a deficit of 3.8% of GDP, or R120.2bn, from R124.3bn the quarter before.

The smaller deficit was mainly attributed to lower gross dividend payments to non-resident investors and a decline in net interest payments to foreign investors, the Bank reported.

Merchandise exports and imports

The quarterly bulletin also showed that the volume of merchandise exports increased 1.4% due to higher export volumes of agricultural and manufactured products.

The increase was only partly offset by a contraction in the volume of mining exports due to strikes. The Bank estimated that the volume of mining exports contracted about 5% over the period — the third consecutive quarterly decline.

The Bank said that in addition to domestic supply constraints, the decrease in mining exports could be attributed to subdued foreign demand for mineral products from South Africa, and for base metals and articles of base metals, notably coal, iron ore and steel destined primarily for China, Japan and India.

Merchandise exports rose to R692.7bn in the third quarter from R688.6bn in the second.

The volume of merchandise imports rose 1.6% in the quarter, while the value of merchandise imports remained broadly unchanged at about R844bn. The volume of merchandise imports rose despite a contraction in the physical quantity of mining imports.

The Bank said the decline in mining imports was mainly due to lower non-oil imports, as crude oil imports rose notably over the period.

Household debt and expenditure

Growth in real final consumption expenditure by households decelerated for the third quarter in succession, to an annualised 2.6% in the third quarter from 3.1% in the quarter before.

Consumption expenditure is important for domestic growth, and a slowing in the growth of consumption expenditure by households does not bode well for economic growth as it accounts for about 60% of GDP.

The moderation in spending was evident in all the categories of durable, semi-durable and non-durable goods.

Growth in spending on services, which accounts for about 25% of overall household spending, slowed to 1.1% in the third quarter after moderating to 1.5% in the second quarter.

Of most concern was a moderation in the pace of spending on non-durable goods, which moderated to 1.7% in the third quarter — its slowest rate of increase since the second quarter of 2010. The Bank said the slower pace of increase in this category reflected subdued spending on food, beverages and tobacco, and household fuel and power, which could be attributed in part to increases in the prices of these products alongside a decline in spending on petroleum products.

Growth in real disposable income of households moderated to 2.6% in the third quarter, after an annualised increase of 3.5% the quarter before, reflecting, among others, modest employment gains, according to the bulletin.

The ratio of household debt to disposable income remained unchanged at 76% in both the second and third quarters.

Consistent with the lower interest rate environment, the ratio of debt-service cost to disposable income decreased to 6.5% in the third quarter, from 6.9% the quarter before.

Growth in real gross domestic expenditure decelerated to 3% in the third quarter from an annualised rate of 4.9% in the preceding quarter.

Capital inflows

In the third quarter, South Africa managed to attract what the Bank said was a sizeable amount of inward foreign direct and other investment capital.

The country recorded net capital inflows on the financial account of the balance of payments to the value of R56.8bn, following an inflow of R48bn the quarter before.

Inflows into the financial account are particularly important for South Africa at this stage, as it helps finance the large shortfalls on the current account.

The Bank said South Africa benefited along with other emerging-market economies as these markets still offered investors higher returns when compared with advanced economies. Interest rates are higher in emerging-market economies than in their developed counterparts.

Direct investment into South Africa increased further by R22.2bn in the third quarter, following a R6.6bn increase in the second quarter, as foreign investors increased their equity stake in existing direct investment entities.

These flows "also reflected loans granted by foreign parent companies to their South African subsidiaries", the bulletin said.

The Bank noted that the resilience of emerging-market economies amid heightened risk in global financial markets was evident in persistent flows of capital into these markets.

Foreign portfolio investment into South Africa was up R27.5bn in the third quarter, after an increase of R22.7bn the previous quarter.

While investors continued to substitute listed equity investments for domestically issued debt securities, the issuance of an international bond by a state-owned enterprise confirmed investors’ interest in the country’s bond market, the bulletin noted.

"The recent downgrade of South Africa’s sovereign ratings is, however, likely to affect investor sentiments towards the country adversely," the bulletin said.