South Africa’s Current Account Deficit Remains Cloudy in 2023

Figure 1: Current Account Balance (Million Rand), November, 2018 – May, 2023

Source: Datastream, Continuum Economics

Figure 2: Foreign Trade (Million Rand), November, 2018 – May, 2023

Source: Datastream, Continuum Economics

After experiencing current account deficits (CAD) every year for nearly two decades, South Africa recorded a current account surplus driven by the pandemic related impacts in 2020, which reached 2% of its GDP. The pattern continued in 2021 while the surplus hit 3.7% of the GDP as exports out grew imports triggered from recovering global demand. The surplus regressed to a R30bln deficit in 2022, nearly -0.5% of the country’s GDP, as transportation bottlenecks got worsen and negatively impacting exports, commodity prices declined and import demand remained strong. 

According to the latest figures, it appears South Africa continues to feel the CA pain acutely in 2023 so far. The CAD widened to R160.7 billion in Q2 of 2023 from a R63.7 billion in Q1, as per the SARB press release on September 7. (Note: CAD as a ratio of GDP widened to 2.3% in Q2 from 0.9% in Q1). According to the mentioned release, the shortfall on the services, income and current transfer account expanded from R174.3 billion in Q1 to R191.8 billion in Q2. The deficit on the services, income and current transfer account as a ratio of GDP widened from 2.6% in Q1 to 2.8% Q2. (Note: This situation also puts further pressure on the weakening Rand and we think the pressure to the Rand should remain high due to shrinking trade surplus and China slowdown and the need for a high country risk premia in long-dated bonds in the remainder of 2023). 

It is worth mentioning that CAD in Q2 was ignited by the decelerating foreign trade surplus. Trade surplus narrowed from R110.6-billion in Q1 to R31.1-billion in Q2 as SARB noted that “South Africa’s terms of trade (including gold) deteriorated in Q2 as the rand price of imported goods and services increased, while that of exports decreased.” 

We project 2023 could be a year with high CAD which will be further strained due to global energy prices in the reminder of the year and energy related capital imports. 2024 is unlikely to bring significant relief to South Africa's current account balance or competitiveness as continued high energy prices, ongoing load shedding and logistics crisis combined with pre-election stimulus spending will likely compound the country's economic challenges. We think ballooning CAD and international debt service requirements would likely exacerbate the need for foreign exchange in the country in the near future. 

On the capital and financial accounts front, things are not smooth sailing either. According to SARB data, net FDI inflows diminished to 1.6% in 2022 from 9.8% of GDP in 2021. According to IMF, gross external financing needs stood at 12.5 percent of GDP in 2022, up from 10.3 percent in 2021. (Note: The IMF estimated that the net international investment position is in surplus at 17% of GDP as of 2022, but fell from 33.3% of GDP in 2020). In this regard, the country should consider prioritizing attracting high quality FDI and productive investments, and encouraging renewable energy efforts to decrease the need for hot cash and also deal with the energy crisis. Taking into account that the general elections are fast approaching in 2024, we feel the government would need additional reforms in the medium term in the energy and transportation sectors to address long-standing impediments in closing CAD and also ensuring necessary capital account inflows. 

As noted, we expect CAD to worsen slightly by the end of 2023 due to weaker external demand especially from China, whose recovery remains faltering, coupled with higher energy related capital imports. (Note: According to External Sector Report of the IMF in 2023, the deficit is expected to improve to about 2% of GDP over the medium term as these factors dissipate and logistical constraints are alleviated). We feel the CA may be still supported by a trade surplus in 2024 coupled with probable FED and ECB easing, which can provide some support for exports, but overall we expect a fall in trade surplus mostly due to global slowdown, particularly China and EU, could darken the CA outlook.