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SA current account deficit narrows to 1.7% of GDP

Pretoria - South Africa's current account deficit narrowed to 1.7% in the fourth quarter of 2016, the first time it reached this level in nearly six years, according to the March 2017 Quarterly Bulletin of the South African Reserve Bank released on Wednesday.

This is down from 3.8% reported in the third quarter. The last time this level was reported was in the first quarter of 2011, said Linda Motsumi, head of the Balance of Payment division. The last three quarters of 2010 also reported deficit levels below 1.7%.

“Whether we see levels of 1.7% of GDP going forward, we are not sure about that,” she said.

The country's trade balance improved significantly during 2016, which impacted the current account deficit, narrowing the ratio to gross domestic product to 3.3% from 4.4% in 2015. The trade balance improved from a deficit of R38bn in 2015 to a surplus of R15bn in 2016.

The balance of payments deficit came down from R166bn to R76bn.

Improved trade

The report indicated that the improvement in the trade balance was brought on by improved trade deficits with Europe and Asia, and a widening trade surplus with Africa.

Increased export earnings of domestic producers and improved foreign demand for domestic goods and higher commodity prices also had a bearing on the trade balance. Domestic demand for foreign produced goods slowed down, and imports contracted in the fourth quarter of 2016.

READ: Trade deficit improves by R9bn - SARS 

“If commodity prices continue to rise, it will support the earnings of exporters and if domestic demand for foreign goods also remains muted it will also support it,” said Motsumi.  

She added that the biggest contribution to the reduced deficit was from trade. The deficit on the trade account as ratio of GDP swung from -0.2% in the third quarter to a surplus of 1.3% in the fourth quarter, she said. This compared to the deficit in services which swung from -3.6% to a surplus of 3%.

“It was coming more from the trade, but we can’t ignore the services because the services also improved,” she said.

The last trade surplus was observed in the second quarter of 2016. “On an annual basis the trade deficit also switched from a minus to a positive. So trade did better,” she said. On an annual basis, the services deficit remained unchanged.

Dividend receipts

Dividend receipts increasing in the second half of the year also helped reduce the current account deficit, said Motsumi. The dividend receipts improved the net income deficit and helped narrow the shortfall on services, income and the current transfer account, the report explained. The shortfall reduced from R159bn in the third quarter to R132bn in the fourth quarter.

Overall, dividend receipts were 20% down on the figure reported in 2015, but still strong, the report indicated. 

“The upward surge in dividend receipts in the fourth quarter of 2016 was countered by an increase in dividend payments to foreign investors,” said the report. The amount of dividend payments to the rest of the world contracted in 2016, the first decline since the 2008-2009 global financial crisis.

Dividend payments to non-residents contracted marginally by almost 1.5% in 2016, compared to 3.7% paid out in 2007.  The negative or slow growth in dividend payments is associated with low economic growth as it impacts company profits. Liquidity needs of parent companies also impact shareholders, the report explained.

Changes in dividend payments to non-residents also have a bearing on the size of the current account’s balance of payments, the report said. “Changes in dividend payments to non-residents are an important determinant to the size of the deficit on the overall account balance of payments.”

The slower growth in dividend payments over the past two years has contributed to lowering the current account deficit, the report said. 

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