Understanding South Africa’s current account deficit

Julie Brownlee, Fsp Invest, 14 Sep. 2015

Tags: current account, current account deficit, what is a current account deficit, economy, south african economy, south africa current account deficit

If you read the financial news, you’ll no doubt have come across references to South Africa’s current account deficit.

So what is a current account deficit? What does it really mean? And why is it a bad thing?

Read on to find out…

Where the current account fits in

To understand the current account deficit, you need to take a broader look at a country’s finances.

All countries run a balance of payments. This is a record of all the transactions a country, like South Africa, makes with the rest of the world.

This balance of payments consists of two parts:

  1. The current account; and
  2. The capital account.

The current account
This includes payments for exports and imports of goods and services. It also includes money coming into the country from citizens who work overseas and income from any offshore investments a country has.

The capital account
This is the difference between the amount a country’s residents invest abroad and the amount foreigners are investing into the country.

The idea behind the balance of payments, as the name suggests, is it should balance. This means if you add the current account and the capital account together, it should amount to zero.

But a common way of doing things is that a country leaves its foreign currency reserves out of the capital account. This can lead to a surplus or a deficit.

South Africa’s current account deficit

In South Africa, there is a current account deficit and it’s a worry for many.

This is because in a worst case scenario, the country may end up in a position that it can’t pay for imports or service its debts if there is a huge outflow from the capital account.

Large current account deficits can worry investors. A country with a high, persistent current account deficit can put investors off.

At the moment, not helping the SA situation is lower commodity prices, which affects demand for our commodity-driven economy and in turn exports out of the country.

So there you have it. Understanding South Africa’s current account deficit.

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