SA’s deficit on the current account, its broadest measure of trade in goods and services, shrank in line with expectations during the third quarter of this year, official data showed on Thursday. The shortfall narrowed to 3,2% of gross domestic product (GDP) — its lowest ratio since the second quarter of 2005 — from a revised 3,4% in the first quarter, the Reserve Bank said in this month’s quarterly bulletin. However, analysts say the benign trend in the shortfall, seen as the Achilles heel of the economy, will not hold in the coming months as domestic demand recovers, boosting imports.

“Given the high propensity of SA to import, we expect that even a moderate recovery in the economy will translate into increased imports,” Thebe Securities economist Monale Ratsoma said. On balance, this would lead to a deterioration in the current account in the medium term, he said. SA’s current account deficit was more than 7% of GDP in both of the past two years, after notching up a modest surplus at the start of the decade.

This is worrying for the country as the gap is financed mainly by foreign buying of local shares and bonds, which can abruptly dry up with shifts in global risk appetite. In value terms, the deficit dipped to R77,4bn in the third quarter of this year from R81bn in the second quarter and R157,3bn in the first. But the shortfall was adequately financed. Portfolio inflows reached R66bn in the first three quarters of this year, compared with an outflow of R71,5bn last year as a whole.

SA’s first recession in 17 years has helped to stem the ballooning deficit, with imports falling much faster than exports due to weak local demand. At the same time, dividend outflows have subsided with waning company earnings. They amounted to 1,9% of GDP in the third quarter compared with a peak of more than 4% of GDP at the end of 2007.

“Looking forward, although exports improved in the third quarter, they are likely to struggle significantly given the still strong rand and sluggish world economic recovery,” said Stanlib economist Kevin Lings. The rand has slipped off its peak for the year at R7,29/, and was at R7,58/ late yesterday. But it has still notched up hefty gains of about 18% against a trade-weighted basket of currencies in the year to date — a trend that reduces the competitiveness of local exports.

SA’s balance of payments would have benefited more from a global recovery in commodity prices if the rand had not strengthened so much, Lings said. But weak import demand was set to keep the trade deficit in check, even though it was likely to weaken over the next few quarters.

The Bank revised the estimated shortfall on the current account last year to 7,1% from 7,4% and for 2007, down to 7,2% from 7,3%. Forecasts from the Treasury in October predicted that the gap would shrink to 4,9% this year — a view many analysts share. Export volumes rose by about 3% in the third quarter of this year, after falling by more than 3% during the second quarter, yesterday’s data showed.

Imports declined by 0,5%. SA notched up a trade surplus of R21,1bn in the third quarter, its second in a row. But the deficit on its net service, income and current transfer payments edged up to R98,5bn from R93,5bn in the previous quarter. Foreign direct investment showed an inflow of R8,3bn in the third quarter, lower than R24,9bn in the second quarter.

Source: (www.businessday.co.za, 20091211)

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