<strong>The SARB data reveal that the Q4 22 current account balance fell to its lowest level since Q3 19</strong>

The current account deficit increased to 2.6% of GDP in Q4 22 from 0.0% in Q3. The outcome was largely in line with our projection, but worse than the 1.5% shortfall predicted by Thomson Reuters. The decline was principally caused by a substantial drop in the merchandise trade surplus, which fell from 3.7% of GDP in Q3 to 0.2% in Q4 22, owing to fewer exports and major disruptions to Transnet’s operations. The impact was mitigated considerably by a reduction in the deficit in ‘invisible’ flows (i.e., services, income, and current transfers) from 3.6% to 2.8%. The Q4 result resulted in a current account deficit of 0.5% of GDP in 2022, compared to surpluses of 2.0% in 2020 and 3.7% in 2021.

“We project that the current account deficit will narrow to 1.7% in Q1 23 as exports recover. For 2023, we forecast a deficit of 1.3% of GDP, leaving the rand somewhat vulnerable to capital outflows. For details, see South Africa: Significant current account deficit in Q4 22 (9 March 2023),” said Thomson Reuters.

S&P has changed the outlook on South Africa’s credit ratings from Positive to Steady, citing continued structural growth restrictions, including heavy load shedding. S&P also stated that changes to strengthen governance and operational performance at state-owned enterprises (SOCs) have been slow, and that SOCs represent significant contingent risks to the fiscus. S&P assigned a positive outlook to South Africa in May 2022, but other rating agencies did not follow suit, owing to the country’s poor structural reform progress, consistently weak growth, mounting socioeconomic pressures, and rising public indebtedness at the time.

In general, rating agencies do not maintain a directional outlook (Positive or Negative) for long, particularly for sub-investment grade assets. As a result, we are not shocked by S&P’s decision, given the significant negative impact that further load shedding is projected to have on SA’s growth prospects, as well as the problems that this creates as the country attempts to reduce its fiscal and socio-economic imbalances. However, S&P stated that the FATF grey listing is unlikely to have a substantial impact on South Africa’s creditworthiness because the government continues to have access to deep local capital markets. With all three rating agencies now maintaining a Steady outlook on South Africa, we expect the sovereign’s existing credit ratings will be maintained for a longer period of time.

“We see a move to Positive outlook as unlikely until there is material progress on eliminating power cuts, addressing other structural impediments to growth and reversing the rise in public indebtedness. Conversely, if the reform progress falters, GDP growth continues to lag population growth and public indebtedness continues to rise, the rating agencies could take a negative view,” concluded Thomson Reuters.