Economic Analysis - Narrowing C/A Deficit Not Necessarily A Positive Story - NOV 2017

BMI View : South Africa will see narrowing current account deficits in the coming quarters, though this will be primarily driven by persistent weak import demand. While the financial account will continue to benefit from robust portfolio inflows, foreign direct investment will remain subdued in the face of the challenging business environment and elevated uncertainty about the direction of politics.

South Africa will post notably narrower current account deficits in the coming quarters. While investment income and transfers to the Southern African Customs Union (SACU) will act as a drag on the country's external account position, we expect continued goods trade surpluses will persist, after the goods trade position swung back into positive territory in 2016. This underpins our view that after a current account deficit of 3.3% of GDP in 2016, the country will post shortfalls of 3.1% in 2017 and 3.0% in 2018.

That said, this seemingly positive story largely belies the underlying challenges facing the South African economy. Namely, while the goods trade account has swung into surplus, this is actually more a reflection of weak demand for imports than strong exports. Similarly, financial account surpluses have increasingly been driven by portfolio inflows, while we have seen more outflows of direct investment than inflows as domestic businesses look to expand abroad and limit exposure.

Narrower Deficits On Goods Trade Surpluses Will Continue
South Africa - Current Account Components, ZARmn (LHS) & Deficit, % of GDP (RHS)
Source: SARB, BMI

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