Does SA’s improved trade balance bode well for the economy?
By Arthur Kamp: Investment Economic, Sanlam Investments
Trade balance data seeing a positive trend
South Africa’s trade balance data is notoriously volatile and it is preferable to look at the underlying trends. Even though the trade surplus shrank to R5.22 billion in July 2016, from R12.47 billion in June 2016, it has been on a strongly improving trend since the second quarter of this year. Indeed, the trade account recorded a surplus of R17.4 billion in the first seven months of 2016, which is a marked improvement on the trade deficit of R24.67 billion recorded in the first seven months of 2015. The improvement reflects the favourable influence of the weak Rand on trade (the fall in the currency in real terms boosts exports and dampens imports with a relatively long lag) and some improvement in South Africa’s export prices since early in 2016 (including platinum and gold).
Benefits of a mostly weaker rand
The return to a trade surplus over the past months (which also suggests the current account deficit is shrinking) is not surprising. The weakness of the Rand in recent years has been indicative of an insufficient inflow of foreign capital. This forces the economy to adjust, including an improvement in the current account. Current account balances improve either through a decline in the ratio of domestic investment relative to GDP or through an increase in the ratio of domestic savings to GDP (that is lower consumption spending) or both. And, this is exactly what we have seen. In the first quarter of 2016 real fixed investment spending and household consumption spending were both negative. Hence, the good news of an improving trade balance is countered by bad news for domestic spending.
The threat of policy uncertainty
At least, however, if the trade balance (and current account balance) improvement is sustained, it lays a better foundation for the economy heading into 2017. The risk, however, is that given the current renewed focus on policy uncertainty, notably fiscal policy, the potential improvement into next year may be abandoned. One possible scenario is that delayed economic reform and heightened policy risk prompt an early downgrade of South Africa’s sovereign debt. Should the policy response be inadequate, this could result in further Rand weakness and additional increases in interest rates, with continued negative consequences for consumer and business spending. Indeed, the risk of recession would increase.
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