Trade Balance Surges Ahead

South Africa’s cumulative trade balance has surged to a new all-time record for the first eight months of a calendar year. Between January and August, the value of exports of goods exceeded imports by a whopping R166-billion.

This achievement has been made possible by a combination of substantial export growth between June and August (7.3% higher than the same period last year) and much lower imports (26.6% lower during these three months last year).

As alluded to in a previous edition of To the Point, the fact that manufacturing sales values have not declined by the same margin as imports indicates a measure of import replacement that has taken place in the wake of the lockdown regulations.

Risk-off investment milieu

Against the background of a risk-off sentiment by global fund managers since the onset of the Covid-19 pandemic, the exceptional performance of the country’s trade balance is most welcome.

During 2018 and 2019, the net inflow of portfolio investment into South Africa averaged a little more than R20-billion per quarter. Due to a COVID-induced preference for safe-haven assets, most emerging markets have had to cope with net outflows of portfolio investment during 2020.

In South Africa’s case, the first two quarters of 2020 witnessed a total net outflow of portfolio investment of R31-billion. Fortunately, however, the cumulative trade balance between January and June was almost three times higher (R90-billion) and another R76-billion has now been generated by net exports during July and August.

Agriculture shines

An outstanding feature of the strong trade balance performance during 2020 is the dominant role of the agriculture and food processing sectors. Their contribution to South Africa’s foreign exchange earnings during the first eight months of the year stands at more than R115-billion.

A cumulative trade surplus of R51.7-billion has been generated in 2020 by the agriculture and food processing sectors, which is 48% higher than the surplus recorded last year (between January and August).

In the process, agriculture and food exports have overtaken the category for vehicles and components as the largest earner of foreign exchange earnings, with platinum and gold in positions number three and four, respectively.

Further good news on the agriculture front is the prospect of bumper harvests and above-average rainfall in the interior regions of the country. According to data published by Agbiz, South Africa is likely to record its second-largest harvest for grains on record, with the maize harvest expected to improve by 38%. Increased production is also expected for sunflower seed, soybeans, sugar cane, citrus, and apples.

Government’s economic policymakers would be wise to take note of the strategic role of the agriculture sector on several levels – including the existence of a pervasive supply-chain; the generation of foreign exchange; employment creation; and food security.

Incentives for increased capital formation in the agriculture sector are virtually non-existent and Pres. Cyril Ramaphosa’s prioritisation of economic growth should consider ways to enhance the international competitiveness of the country’s food producers.

Dr. Roelof Botha, Economic Advisor, Optimum Investment Group