21 Jun 2013 Don’t be fooled by the Lucky Quarter of our Balance of Payments!
So most economists were surprised by the narrowing of the Current Account deficit of the Balance of Payments from 6.5% of GDP to 5.8%, especially whilst forecasts expected it to widen to 7% or more. On top of that the Capital Account registered even bigger inflows than the 4th quarter while we were worried that portfolio inflows into our Bond and Equity markets declined. Did we turn the corner and can we expect the Rand to strengthen from now on? Far from it. A number of factors made the first quarter a very lucky one for South Africa, but they are unlikely to be repeated.
- The Current Account benefitted from increased export earnings (+12%) as a result of the weaker Rand exchange rate, but also from stable mining production as a result of fewer strikes. Strikes negatively affected exports in the fourth quarter of 2012. But labour unrest is again rearing its head as we approach major wage negotiations and Cosatu elections. This will affect the volume of exports despite the positive effect of a weaker Rand. Imports are not yet decreasing as a result of the weaker Rand, having risen 9% in the quarter.
- The Services Account of the Current Account also benefitted from increased net dividend receipts and, surprisingly, net travel receipts from foreign tourists. Are South Africans going to continue to refrain from overseas travel on a sustainable basis? I doubt. I am not sure how much hosting the African Cup of Nations helped, but that will also not be repeated.
My conclusion is that the Current Account was helped by events that are not going to repeat in the next quarter or two.
Let’s now turn to the Financial Account or Capital Account of the Balance of Payments as it used to be called. Net Capital inflows increased from R48,8bn in the 4th quarter to R55,5bn in the 1st quarter, or from 6% of GDP to 6.8%. This is the area I expected worse numbers as we saw foreign capital flows into our Bond and Equity markets come under pressure. Net portfolio flows did in fact turn negative, from plus R3,3bn to minus R4.5bn, a swing of nearly R8bn. Portfolio inflows into our markets deteriorated from an average of R23,6bn last year to only R1,4bn in the 1st quarter of 2013. This even included the proceeds of international bond issues by local private sector companies.
So how did the Capital Account register such a sweet inflow? I quote from the SARB Quarterly Report: “The capital inflow in the first quarter originated mainly from long-term loan financing extended by foreign parent companies to their domestic subsidiaries”. Most of that was in the Banking Sector. Again this is unlikely to be repeated.
Most economists saw the Balance of Payments release in a positive light and welcomed it. I fear they did not delve deeper into the numbers. Without these events, which are unlikely to repeat, the Balance of Payments would have looked gravely more negative. The next quarter might reveal just that as portfolio inflows are still under a lot of pressure. Without portfolio and other capital inflows the deficit on the Current Account cannot be financed, our reserves are just too small. The full damage will then be felt on the Rand Exchange rate. In my opinion the Rand can weaken further.
Head Sanlam iTrade