Better-than-expected data on the current account of the balance of payments came as positive news that helped to underpin the rand exchange rate.
The deficit on the current account narrowed by more than market consensus in the fourth quarter, and for 2024 as a whole it was 0.6% of GDP, down from 1.6% in 2023. The narrower the current account deficit, the less SA needs by way of foreign capital inflows to fund it, and the less pressure there is on the rand exchange rate as a result.
That’s one reason the rand performed strongly last week, and has been the third strongest emerging market currency over the past year.
It’s by no means the only reason: external factors have been as, or more, important in the past couple of weeks, as the full affect of US President Donald Trump’s maverick and shifting economic policies on the US economy have started to sink in. He inherited an extremely strong economy, but it is weakening rapidly, evident in part in disappointing US jobs numbers last week.
With the economy sliding, the US Federal Reserve is now expected to opt for more interest rate cuts than expected earlier this year — markets are pricing in three more cuts this year where previously they were pricing in fewer than two. Interest rate cuts are negative for the dollar, which has been weakening, so positive for other currencies, including emerging market currencies such as our own.
Also helping the rand and its peers has been the retreat of sorts that Trump has made on the steep tariffs he sought to impose on imports from Canada and Mexico. As it turned out, those would hurt the US auto industry as well as US farmers, hence the temporary suspension of the tariffs. It’s all a crazy and unpredictable mess, so any external good news for the rand could swiftly turn to bad news, especially in a world that could erupt in trade wars.
But in a risky global environment, investors do differentiate to some extent among emerging markets, so how vulnerable the rand is depends also on SA’s own economic outlook. And there were some encouraging signals in the details of the current account numbers. There are two components to the current account. One is the trade account, which reflects imports and exports of goods. The other is the service and income account, which reflects flows such as dividends, interest and royalty payments, as well as tourism inflows and outflows.
A surplus on the trade account isn’t always good news, because when the economy is weak, imports tend to be low. In this case, however, the improved surplus was driven more by higher exports and better global pricing for those than by slower imports. A better performance on goods exports is a good sign for SA’s economy.
So too was the better export performance on services, specifically tourism. That is captured in the narrower deficit that the services account recorded for the fourth quarter and the year as a whole.
If SA wants to grow faster, create more jobs and attract more hard currency into its economy it must lift its exports of goods and services. Much more needs to be done on both fronts but the latest current account numbers suggest some progress is being made.
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