Balance of Payments, Syria, strikes and putting money back.

Balance of Payments, Syria, strikes and putting money back.

South Africa’s Balance of Payments data  was announced today. The Current Account deficit amounted to 6.5% of GDP versus 6.2% expected and 5.8% in the first quarter. Please refer back to my previous Blog about the Balance of Payments, The Lucky Quarter.

A few points on the release. I am more worried about the Capital (Financial) account.

1.    Summary:
a.    In June I warned about the once-offs that caused the surprisingly better deficits.  We still benefitted a little bit from net travel receipts, but dividend receipts contracted substantially.
b.    Last time there was a big loan from a parent company in the Financial sector, this time a big loan in the petro-chemical industry that helped the Capital Acc. Will we have one every quarter to save us?
c.    Portfolio flows moved substantially worse, from an inflow in Q1 to the first quarterly outflow of capital since the third quarter of 2011. Dangerous.
d.    The one flicker of light was a return to appetite for equities by foreign investors.

2.    Current Acc:
a.    Deficit widened from 5.8% of GDP to 6.5%.
b.    Trade deficit widened from 2,4 per cent in the first quarter of 2013 to 2,9 per cent in the second quarter.
c.    Despite a decline of 6.8% in the nominal effective exchange rate of the Rand, the volume of merchandise exports advanced by a disappointing 0,6 per cent in the second quarter of 2013 following an increase of 7,6 per cent in the first quarter. There was a marked decline in vehicle exports, and the strike is only now in the third quarter.
d.    The $ price of non-gold mining export commodities declined by 8,0 per cent in the second quarter (increase of 8.7% in Q1), largely offset by the depreciation in the exchange rate of the rand, lifting the rand price of total merchandise exports.
e.    The volume of merchandise imports, which increased by 8,2 per cent in the first quarter of 2013, advanced by roughly only 1 per cent in the second quarter.
f.    The deficit on the services account widened from R112,7 billion in the first quarter of 2013 to R119,6 billion in the second quarter. The widening of the deficit could partly be explained by a contraction of almost 19 per cent in dividend receipts following a significant increase in dividend income in the first quarter of 2013. (This is one of the once-offs I warned about in June.)
g.    South Africa’s terms of trade deteriorated in the second quarter of 2013 as the rand price of imports accelerated at a faster pace than that of exports.

3.    Capital Acc:
a.    The net inward movement of foreign capital through the financial account amounted to R39,4 billion in the second quarter of 2013, compared with an inflow of R55,5 billion in the first quarter, decline of 19%.
b.    Foreign direct investment into South Africa amounted to R17,4 billion in the second quarter of 2013, compared with an inflow of R12,9 billion in the first quarter. This capital inflow primarily reflected a sizeable foreign loan granted by a foreign direct investment enterprise to its South African direct investor in the petro-chemical industry.
c.    Inward foreign portfolio investment flows into our Bond and Equity markets switched from an inflow of R1,4 billion in the first quarter of 2013 to an outflow of R5,3 billion in the second quarter – the first quarterly outflow of capital since the third quarter of 2011.
d.    The acquisition of domestic equity securities by foreign investors rose from net purchases of R1,1 billion in the fourth quarter of 2012 to R20,5 billion in the second quarter of 2013.
e.    The value of South Africa’s gross gold and other foreign reserves declined from US$50,0 billion at the end of March 2013 to US$47,0 billion at the end of June.

Conclusion:

Quite a few things have changed since my last Blog about taking money off the table:

  • The Balance of Payments deteriorated more than the economists expected, but I expected even worse. The big loan helped the Capital Acc. I am still worried about the Capital Acc, but the next release is only in 3 months.
  • Military intervention in Syria looks less likely now.
  • Quite a number of strikes have been resolved by now and we are moving closer to the end of this strike season.
  • The JSE made a new high today, which means I have to admit I was wrong about the correction.

In light of all the above I think the small correction we had might be all we get now and I will put money back on the markets. JSE equities are still very expensive, but there has been a noticable swing out of Bonds into Equities and it also looks like emerging markets are finding favour again after good economic data from China. Fortunately the market is only 2.5% up from tthe time I wrote the previous Blog. I have to admit That I was wrong this time.

Gerhard Lampen.

Head Sanlam iTrade.

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