Volatile rand fuels growing trade deficit

More exports to the rest of Africa have helped to narrow South Africa's trade deficit in March.

Africa is the only continent with which South Africa has a trading surplus, trade data released by SARS shows. Exports of about R11-billion to the region helped to stretch the surplus to R3.22-billion over the month.

But South Africa buys more from the rest of the world than it sells. Imports exceeded exports by R7.8-billion, compared to R9.5-billion in February.

Though this was better than expected, economists remain concerned about the size of the deficit and the risk it poses to the value of the rand.

The currency was still trading at around R8.55 against the dollar by December, but fell as low as R9.30 in March. It recovered to about R9.03 yesterday.

The weaker rand contributed to the trade deficit by making imports more expensive. Consumers felt it in fuel price increases.

For the first three months of the year, imports exceeded exports by nearly R42-billion, more than 50% higher than a year ago.

Though March showed exports improving somewhat, Shireen Darmalingam, an economist with Standard Bank's research unit, said she expected more trade deficits during the rest of the year.

Exports grew by almost 3% month-on-month, but, according to Darmalingam, this was significantly lower than average growth in March (12.7%) over the past 13 years.

The trade account is important for South Africa's finances. Large deficits on the trade account widen the gaping hole in South Africa's current account.

"South Africa's reliance on foreign capital flows to finance its massive current account deficit is concerning. It leaves the economy exposed to major fluctuations in global liquidity and makes the currency especially vulnerable," said Darmalingam.

Nedbank economists said the numbers released on Tuesday might support the rand in the short term.

"The smaller-than-expected shortfall recorded in March is good news, but the monthly data is volatile and does not necessarily point to a sustainable improvement in South African trade. Over the quarter, the trade deficit remained wide."

The economists also expect exports to be under pressure as South African mines and manufacturing companies are still facing difficult operating conditions. These include electricity price hikes above inflation and higher wage demands.

"Imports, however, will continue to benefit from purchases of capital equipment, as the government's large infrastructure development programme continues," said Nedbank's economists.