The most closely watched numbers in the Reserve Bank’s quarterly bulletin tend to be the balance of payments figures, which can drive the rand exchange rate up or down because of what the numbers imply for how much foreign financing SA needs — and how much it is getting.
A key number is the deficit on the current account of the balance of payments, which reflects the balance on SA’s imports and exports of goods as well as service and income flows such as dividends, interest and tourism payments. SA has long run a current account deficit and depends on inflows of foreign capital to finance this. Since SA tends to receive relatively little foreign direct investment, it is dependent on more volatile portfolio inflows from international investors to keep the balance.
The balance of payments numbers in the latest quarterly bulletin will disappoint many in the market who had been expecting a better outcome on the current account. The current account deficit has been falling lately, as much because the economy is weak and consumers and companies are not importing as because SA is exporting more. This time, the market consensus was for it to fall to 2% of GDP in the third quarter, from 2.4% in the second quarter and 3.3% for 2016 as a whole.
In the event, the current deficit fell only as far as 2.3%, with the trade balance improving as expected but the services and income side of the current account slightly worse. Arguably, that’s in part the price SA pays for foreign investment — the capital that comes in from foreign investors has to be serviced with dividend and interest payments to them.
However, a key aspect of the current account is that it includes transfer payments that SA makes to our Southern African Customs Union (Sacu) neighbours. Those payments are made in terms of a formula that links them to imports into SA, some of which would be destined for neighbouring countries, but they are effectively a kind of development subsidy that SA provides to its poorer Sacu neighbours — some of whose public finances, Lesotho’s for example — are heavily dependent on the Sacu transfers.
The Sacu transfers average almost 1% of GDP, so whatever the state of SA’s economy or its exports or foreign payments, SA would still be running a current account deficit of at least that.
A box in the latest quarterly bulletin shows, however, that there have been some technical issues related to the formula over the past couple of years, which have made the picture a bit more complicated. In the 2016-17 fiscal year, transfer payments to Sacu fell quite significantly, to R39bn from R51bn the previous year. In the current year, they are back to normal at R56bn.
The effect, then, is that the current account wouldn’t have recovered as much as it did in 2016 without some help from the Sacu transfers — but this year, the recovery has been much better than it looks. Take out Sacu and the deficit drops to a much more manageable 1.4% in the third quarter.
That still needs to be financed and, fortunately, the bulletin reports there was a net inflow of capital of R17.4bn in the third quarter, up from R3.2bn in the second quarter. However, direct investment — in new and expanded factories or mines or services businesses — continues to be a negative, with South African companies doing much more direct investing offshore than foreign companies are doing inwards. That leaves SA dependent on foreign flows into its equity and bond markets and therefore on international investor sentiment, volatile as it is.
The numbers show net portfolio inflows into SA improved in the third quarter and remain robust.
But there’s plenty of reason to be concerned about those flows as globally there are questions about how long emerging markets will remain in vogue and, locally, SA goes into the ANC elective conference. There’s a great deal of foreign money riding on the conference — and the effect on SA’s balance of payments and its currency could be significant either way.