The wide ZAR17.1bn January trade deficit highlights external balance weaknesses

 

South Africa’s merchandise trade balance swung back into deficit territory in January, coming in at -ZAR17.1bn. The print was substantially worse than the consensus forecast of -ZAR12.2bn and comes on the back of consecutive surpluses in November and December. The reversal into the deficit in January was the result of a sharp increase in imports of 27.9% m/m, eclipsing a paltry 0.1% m/m increase in exports.

The former was driven by strong growth in purchases of machinery and electronics (+27.9% m/m), as well as mineral products – mostly crude oil (+27.8% m/m) and vehicle components (+71.2% m/m). Weighing on export growth were large declines in the exports of vehicles (-20.0% m/m), machinery (-17.2%) and precious metals and stones (-14.7%).

We think that the sharp fall in vehicle exports could be related to a factory re-tooling at a major car exporter. This may weigh on vehicle exports for a few of the coming months, but we will be monitoring the data closely for any signs of this effect.

While the large merchandise trade deficit in January could be startling, particularly in light of the two surpluses recorded in November and December, the first thing to remember is that there is strong seasonality around the turn of the year. Beyond that, we think the data highlight a point we have made previously: the weaker rand has still not affected trade activity positively, and South Africa’s external balance is likely to remain a concern going forward, supporting our view that the rand is likely to weaken over coming months.

We argued in South Africa’s current account deficit: Weak rand offers no respite, 11 November 2013, that domestic manufactured output is likely to adjust to the weak rand only gradually as the sector battles other competitiveness challenges and domestic infrastructure constraints. At the same time, flagging commodity prices bode ill for primary commodity exports, which are roughly 40% of the total export basket.

Meanwhile, as the January data demonstrated, the import bill of goods with limited domestic alternatives, such as machinery and crude oil, will likely remain elevated. One major downside risk for the trade balance is the platinum sector strike, currently in its sixth week. Given that platinum accounts for 16% of total exports, the persistence of the strike carries significant risks for the trade balance in coming months.

Figure 1: Trade balance swings back into deficit in January
Trade balance swings back into deficit in January
Source: SARS, Barclays Research
Figure 2: Terms of trade have worsened notably
Terms of trade have worsened notably
Source: SARS, Bloomberg, Barclays Research