South Africa's current account has consistently been in deficit since mid-2002 and, based on government's latest projections, this structural imbalance is likely to remain a burden for the foreseeable future (see figure 1). Superficially, a current account deficit is often deemed indicative of a country that has an uncompetitive exchange rate, which can often render a currency with such an impediment particularly vulnerable in times of market turmoil.
However, when it comes to South Africa, it is crucial to recognise the components that are primarily responsible for the current account shortfall. South Africa's trade balance is, by some margin, the biggest component of the country's overall current account deficit (see figure 2), but we would also like to highlight the fact that net dividend outflows have also picked up significantly in recent years as a result of the increased foreign ownership (roughly 30%) of the Johannesburg Securities Exchange (JSE) (see figure 3). Increased levels of foreign exposure to our equity markets imply that non-residents want to take advantage of South Africa's unprecedented levels of consistent economic growth and that the resource-laden local bourse is well placed to take advantage of the prevailing commodity bull run.
Closer inspection of the trade balance indicates that machinery and oil-related products have contributed the most to the country's overall imports bill in recent years, with the former being a function of the government's R416 billion infrastructure drive plans over the coming few years (see figure 4). The continued rise in oil-related imports is related to the rampant rise in global energy prices, which have not been completely offset by simultaneous rand strength. Meanwhile, the increased appetite for infrastructure-related goods has been made necessary by South Africa's escalating capacity constraints which, if not resolved, may hinder overall economic output and precipitate inflation bottlenecks in the supply chain (see figure 5).
Closer examination of the government's Capex programme shows that the greatest growth in infrastructure expenditure is expected to take place in the electricity front, which is hardly surprising considering that, at present, growth in electricity production is not managing to keep abreast with growth in expenditure. There is also expected to be some strong capital expenditure when it comes to socio-economic sectors such as health, education and housing. This would be a particularly encouraging development, considering that numerous rating agencies have repeatedly said that South Africa's lingering social economic problems are preventing the country from being rewarded with an improved rating that would be more representative of its sound economic and financial indicators.
- Euromoney Foreign Exchange & Treasury Management Handbook, 2007.