South Africa's current account deficit widens

Overall, the deficit on the current account of the balance of payments widened to 7.0% of Gross Domestic Product in the first quarter of 2009, said the bank in its quarterly bulletin.

Drop in demand

Since half the country's merchandise is destined for the United States, Europe and Japan, the decline in real production in these economies has “severely” affected the volume of merchandise exports in the first quarter of the year.

Further to this, imports from these economies also shrank due to the slowdown in domestic demand.

“As a result, the deficit on the trade account widened from R19.6 billion in the fourth quarter of 2008 to R53.4 billion in the first quarter of 2009,” said the central bank.

A trade deficit of a similar magnitude was recorded in 2008's first quarter at the time when the country was experiencing power outages.

The slowdown in domestic production, together with lower prices of some commodities and a decline in company profits, has played a role in the lower net dividend payments to non-resident investors in the first quarter of the year.

The SARB said the deficit on services, income and current transfer account with the rest of the world narrowed noticeably, though this was not enough to prevent the current account deficit from widening.

“The deficit on the services, income and current transfer account with the rest of the world moderated further to R110.3 billion in the first quarter of 2009 from R117.7 billion in the fourth quarter of 2008,” said the SARB.

Dividend payments

As for gross dividend payments to non-resident investors, this declined notably in the fourth quarter of last year while remaining subdued in the first quarter of 2009.

“In fact, the level of gross dividend payments in the first quarter of 2009 was almost 16% lower than the average for similar payments in the first nine months of 2008, reflecting the slowdown in economic activity, lower profitability as well as companies' preference to retain profits for business operations amid tight liquidity conditions in financial markets,” the report explained.

The financial crisis and its associated contraction in trade volumes were accompanied by a reduction in capital flow mobility particularly towards emerging economies.

“Notwithstanding these negative developments, South Africa attracted net capital inflows to the value of R35.3 billion in the first quarter of 2009 after recording a surplus of R39.1 billion in the fourth quarter of 2008.

“These capital inflows mainly reflected the revival of inward portfolio investment capital and a steady increase in foreign direct investment into the country. As a result of reduced capital flows, the balance on the financial account of the balance of payments, including unrecorded transactions, declined from 6.6% of gross domestic product in the fourth quarter of 2008 to 6.1% in the first quarter of 2009,” reads the bulletin.

Foreign direct investment

Foreign direct investment into South Africa amounted to an inflow of R11.7 billion in this year's first quarter compared to an inflow of R3.3 billion recorded in the last quarter of 2008.

According to the SARB, this inflow could be attributed a substantial equity investment by a non-resident investor in a South African mining company.

“Inward portfolio investment switched around from a net capital outflow of R57.3 billion in the fourth quarter of 2008 to a capital inflow of R10.1 billion in the first quarter of 2009 as foreign investors increased their holdings of South African equity securities, while disposing of debt securities,” said the SARB.

The favourable investor sentiment towards domestic equity securities emanated partly from the improved outlook for equity returns in view of stimulatory fiscal and monetary packages.

Additionally, year on year rates of targeted consumer price inflation moderated further in the opening months of 2009, said the central bank.

It said that this remained above the inflation target range of 3 to 6%. Food price inflation also remained stubbornly high for consumers.

Article published courtesy of BuaNews