Getting to grips with economics: What is the current account?

Julie Brownlee, Fsp Invest, 13 Apr. 2015

Tags: current account, what is the current account, current account deficit, south africa’s current account, economics, economy, balance of trade

When the South African Reserve Bank releases its quarterly current account numbers, the market waits with baited breath.

Recently, SA has run with a high current account deficit, which isn’t good for the country’s economy.

So what exactly is the current account? And what affects it?

Read on to find out more…

What is the current account?

South Africa’s current account, as well as for other countries, shows the difference between what the economy earns from exports and what it spends on imports.

Generally there are two main aspects to the current account:

  • There are visible imports and exports, such as cars or commodities; and
  • There are invisible imports and exports, such as financial services or tourism, which involves overseas buyers.

The difference between all these exports and imports is the ‘balance of trade’. You either get a surplus or a deficit:

  • A current account surplus is when exports exceed imports; and
  • A current account deficit is when imports exceed exports.

Also included in a country’s current account are remittances and income from overseas investments.

Remittances are usually from workers sending money back home.

What’s going on with South Africa’s current account?

At the moment, SA is running a current account deficit as imports outweigh imports. Last month, the Reserve Bank released its current account data from the last quarter of last year, which showed a slight improvement from the third quarter of 2014.

The persistent deficit is worrying as it makes the country more dependent on capital flowing into the country from foreign investors to make up the difference.

These inflows are very sensitive to investor sentiment and the prevailing appetite for risk. And with the US likely to hike interest rates this year, this could turn investors away from SA.

So there you have it, what the current account is.

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