By Kevin Lings*
In May 2021, South Africa’s trade balance recorded another extremely large surplus of R54.6bn, which was bigger than market expectations for a surplus of R49.6bn (Bloomberg). SA has recorded a trade surplus in each of the past 13 months and in 21 out of the past 24 months. Over the past 12 months South Africa trade balance has achieved an average monthly surplus of R38.6bn.
The latest trade surplus for May 2021 compares with a revised surplus of R51.3bn in April 2021 and a surplus of R52.6bn in March 2021. Incredibly, year-to-date SA has recorded a cumulative trade surplus of R202.6bn, which compares with a modest surplus of R10.6bn during the corresponding period in 2020. Year-to-date exports have risen by 53.7%, boosted by both a low base effect as well as significantly higher commodity prices. In contrast, imports have risen by a much more modest 10.6%. Critically, the modest growth in imports reflects South Africa’s weak economic performance, including a massive fall-off in fixed investment activity as well as a substantial and sustained run-down of inventories (see chart attached).
It is also worthwhile highlighting that in the first five months of 2021, SA exports of mineral products (which includes mostly coal) have risen by 51.7%y/y, precious metal exports are up 101.6%y/y, while vehicle exports have increased by 71.6%y/y, although this is mostly due to base effects. There is also a reasonably strong relationship between the rate of change in international commodity prices and the performance of the Rand/Dollar (see chart attached). This does not mean that the Rand will keep strengthening as long as commodity prices remain elevated, but it seems clear that the record trade surpluses SA has achieved in recent months have contributed enormously to the relatively strength of the Rand. (Year to date the Rand is the third best performing emerging market currency (after Taiwan and Brazil), gaining 2.6% against a stronger Dollar.
Lastly, as mentioned above, the improvement in SA’s trade balance is also revealing itself in a depletion of inventories. From the graphs attached it is clear that SA has run down inventories substantial over the past two years, especially as business confidence remained weak and companies tried to reduce costs and conserve cash. Consequently, any sustained pick-up in domestic economic activity over the next year or two would probably result in increased imports. Unfortunately, is this re-stocking process is accompanied by a weaker exchange rate, then there would be some upside risk to SA inflation.
- Keving Lings is chief economist at Stanlib
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