Dark side of improved balance of payments

The Covid-19 lockdown dramatically altered the relationship between SA and its global trading and financial partners. What followed was a dramatic improvement in the balance between exports and imports.

After 2020 exports, helped by higher prices, grew faster than imports, taking the balance of trade to almost 10% of GDP by the second quarter of 2021. As export prices have fallen off more recently the trade surplus has declined to a still impressive 4.8% of GDP.

The difference between exports and imports is also the difference between GDP — output, or incomes earned producing that output — and gross domestic expenditure, mostly on consumption by households and partially on capital goods by firms that can be funded with loans to supplement incomes.

The positive trade balance represents an excess of local supply over local demand, a contributor to global supply chains rather than a drawer or absorber of them. The state of the SA economy has thus helped dampen global inflation.

The closely watched current account of the balance of payments adds foreign, mostly investment, income to the trade balance. SA borrowers and capital raisers pay out interest and dividends at higher rates and yields than they typically receive from their foreign investments. Even though SA’s foreign assets roughly match foreign liabilities (thanks to Naspers and its Tencent investment), this force usually turns trade surpluses into current account deficits, meaning the sum of the trade balance and the net foreign income accounts.

Current account deficits (or surpluses) are by definition equal to foreign capital inflows or outflows. Instead of drawing on global capital markets to fund capital expenditure, SA savers became a significant source of funds. The current account is now in rough balance.

Rather a lender than a borrower is conventionally good news for balance sheets and credit ratings, provided all else remains the same. Ideally, raising capital — even debt — to spend on capital goods with long productive lives that earn above the cost of debt is good for any company or government. It means faster growth, which is the key to attracting capital — especially equity capital — on favourable, risk-adjusted terms.

However, the influence of removing one of the SA deficits — the capital account deficit — and improving the fiscal deficit, also with the help of exporters — has not been conspicuous in the market for rand. The randdollar exchange rate, as for all other currencies, is being dominated by the dollar and the actions of the US Federal Reserve.

There is a dark side to SA ’ s reduced dependence on foreign capital. The reason the SA trade balance has improved as much as it has is because the rate at which South Africans have saved since Covid disrupted incomes and output has held up far better than the rate at which the economy has added to its capital stock.

The ratio of capital expenditure to GDP has continued to decline, from about 20% of GDP before 2016 to the current 14% of GDP. The savings rate appears to have stabilised at about 14%.

These capital expenditure trends portend very poorly for the economy. They imply persistently slow growth that will continue to threaten the government’s ability to raise revenues to fund its ambitious welfare programmes. Slow growth adds to the risk of investing in SA and the cost of raising capital from all sources, domestic and foreign. It means less capital expenditure and slower growth.

Ideally, SA should be raising its capital expenditure rate and funding it by attracting foreign capital on favourable terms, and growing faster by reducing the risk premium with appropriate actions.

Current account deficits and capital inflows to fund growth would then be welcome.