Highest trade deficit on record for SA

SA has recorded its highest monthly trade account deficit to date on the back of rand strength but is expected to improve in the coming months.

According to the South African Revenue Service (SARS) SA recorded a trade deficit of R27.66bn in January compared with a deficit recorded of R11.28bn in the same period a year ago. Based on historical data available — it’s the biggest deficit ever recorded.

The trade statistics indicate the balance of trade. A deficit occurs when the cost of SA’s imports exceeds the value of its exports.

In Janaury, a deficit is typically incurred as imports increase from the seasonal decline in the month of December when factories usually close operations and generally does not inform the trade performance of the SA economy for the rest of the year.

Chief economist at the Institute of Race Relations, Ian Cruickshanks said: "You’ve got to look at the dollar to rand and the strength of the exchange rate. This has blown up the cost of imports in rand terms."

In January, there was not only a spike in imports, but also a notable drop in exports. The deficit is attributable to exports of R80.51bn and imports of R108.17bn. Exports decreased from December 2017 to January 2018 by R23.52bn (22.6%) while imports increased by R19.45bn (21.9%).

In January and December, the rand made significant gains following President Cyril Ramaphosa’s election as ANC president.

Cruikshanks added that on the export side, all operations shut down in December to mid-January while on the import side, goods are unevenly distributed in terms of delivery times.

Nedbank chief economist Dennis Dykes said it was a massive deficit given the strong trade performance in recent months but added that it is likely a once off.

"We should have a big bounce back in February when exports normalise," he said.

Overall, he added the outlook for trade in 2018 remains favourable as exports will be supported by the stronger global economy and higher commodity prices, while import demand will be underpinned by improvement in domestic demand and a firmer rand.

Should the strength in the rand remain, it will shield the economy from imported cost pressures which will ease inflation, said Investec economist Laura Hodes.

Producer price index (PPI) decelerated slightly to 5.1% in January from 5.2% in December.

"With the significant appreciation in the rand exchange rate since mid-November still to filter through into pricing and lower fuel prices early in 2018, producer inflation could moderate in the near term, but is forecast to trend gradually higher towards end-2018,"said NKC economist Elize Kruger.

The lower inflation trajectory has also reignited arguments that the Reserve Bank will make another interest rate cut this year.

Favourable inflation trends in both consumer and production inflation coupled with weak economic growth saw the bank cut interest rates by 25 basis points in July 2017.

Kruger explained that the combination of a resilient exchange rate, moderation in oil prices and weak growth suggest that the bank may cut rates at the next meeting of the monetary policy committee in March.