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In today's blog we will take a more detailed look at South Africa's trade deficit over time. And see if there are any obvious seasonal patterns that one can detect in the data. As the trade surplus for March 2017 surprised many a analyst with it being in the region of R11billion for March 2017. Essentially South Africa exported R11billion more in goods than it imported. Was this a one of or do we see trade surpluses regularly during this time of the year. We take a look
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Trade balance mostly a trade deficit. Very few months of trade surpluses for SA
As the graphic below shows, there are very few months in which South Africa''s trade balance was a surplus. For most months, South Africa had trade deficits. I.e South Africa imports more than what it exports. This has a negative implication on the country's exchange rate, as economic theory suggests the exchange rate will continue to weaken up to the point where imports equal exports. Reasoning behind this is as the exchange rate depreciates, imported goods gets more expensive and exported goods gets cheaper, thus a country will export more and import less until there is equilibrium. If there is a persistent trade deficit one will see persistently weak exchange rates. (As is the case in South Africa).
The line graph above does seem to show distinct seasonal patterns. For example every December South Africa shows a trade surplus, and the majority of October months the trade balance is a lot worse than the month before it (September). In the month of March of the time period in question (January 2010 to March 2017), in 5 of the 8 March months in this time period South Africa has seen a trade surplus. Thus in the majority of cases one would expect South Africa to have a trade surplus in March of every year.
The table below shows the average trade balance per month (from January 2010 to March 2017) and the total trade deficit of each month for the same period.
Month |
Average |
Total |
January |
-12 020 105 761 |
-96 160 846 087 |
February |
-624 784 618 |
-4 998 276 945 |
March |
1 412 553 489 |
11 300 427 911 |
April |
-3 099 782 949 |
-24 798 263 590 |
May |
1 448 615 722 |
11 588 925 777 |
June |
4 425 982 882 |
35 407 863 059 |
July |
-583 900 830 |
-4 671 206 642 |
August |
-6 111 853 002 |
-48 894 824 016 |
September |
118 322 895 |
946 583 157 |
October |
-8 935 004 704 |
-71 480 037 631 |
November |
248 598 971 |
1 988 791 765 |
December |
7 186 820 198 |
57 494 561 584 |
Total |
-16 534 537 707 |
-132 276 301 658 |
As the table above shows January seems to be a notoriously bad month for South Africa's trade deficit. With Januaries contributing a whopping -R96billion to South Africa's trade balance. Other particularly bad months for South Africa's trade balance includes August and October. On the other side of the spectrum, December, June and March seem to be particularly good months for South Africa's trade balance. With the average trade balance in December amounting to R7.2billion, June R4.4billion and March R1.4billion
However when looking at the total column, one can see the true picture of South Africa's trade balance. One average South Africa's trade deficit increases by about R16.5billion a year (and from Jan 2010 to Mar 2017) the total cumulative trade deficit of -R132.2billion. Essentially South Africa has imported R132billion more in goods than what it exported. And we are not sure a weakening exchange rate will solve this problem. Why do we think that a weakening exchange rate will not solve South Africa's trade deficit problem?
The problem here is the fact that South Africa imports essential goods (think of Crude Oil), while we export mostly commodities such as platinum, gold and coal. Now it is a lot easier for other countries to survive wihtout what SA is exporting than it is for South Africa to survive without exporting crude oil.
Another reason for the massive trade deficit is commodity prices. Significant declines in commodity prices have meant that South African firms receive a lot less for the commodities being exported than what they received in the past. In 2010 and 2011 SA fetched in the region of $1700 per ounce of platinum. In recent years this figure has been hanging around $950 an ounce. Almost half of what was paid per once 6 to 7 years ago. And this has contributed a significant chunk to SA's trade balance shifting from a surplus in 2010 and 2010 (cumulative surplus of R103billion) by end 2011, to a trade deficit of -R132billion. Thats a whopping R230billion swing in SA's trade balance in the space 5 years and three months.
Thus exchange rate weakness will not help in this case, as a large part of this deficit is due to the structure and make up of what South Africa exports and imports. A stronger exchange rate would make South Africa's crucial imports such as crude oil a lot cheaper (and this could reduce the trade deficit more than a weaker exchange rate could by making imports more expensive and exports more lucrative). SA policy makers should therefore look to ensure SA's strucuture and make up of what it imports and exports changes so that SA and its trade balance is not so adversly affected by global factors outside of SA's control (like the rot in commodity prices).
Thus exchange rate weakness will not help in this case, as a large part of this deficit is due to the structure and make up of what South Africa exports and imports. A stronger exchange rate would make South Africa's crucial imports such as crude oil a lot cheaper (and this could reduce the trade deficit more than a weaker exchange rate could by making imports more expensive and exports more lucrative). SA policy makers should therefore look to ensure SA's strucuture and make up of what it imports and exports changes so that SA and its trade balance is not so adversly affected by global factors outside of SA's control (like the rot in commodity prices).