South Africa’s current account deficit narrowed to 5.8% of gross domestic product (GDP) in the first quarter of 2013 from 6.5% in the fourth quarter of 2012, the South African Reserve Bank (SARB) said in its quarterly bulletin. The current account shortfall stood at ZAR 190.9bn (EUR 14.3bn) in Q1 2013, compared to ZAR 212.6bn in Q4 2012.

SARB explained that the lower deficit reflected an improvement in the trade balance, which benefited from an increase in external demand, especially from emerging-market economies, and also from firm international prices for South African export commodities coupled with the depreciation of the rand, which boosted the competitiveness of domestic exporters and brought higher rand revenues. Imports also rose significantly as domestic expenditure expanded, but at a lower rate than exports, the central bank said.

The trade deficit narrowed to ZAR 78.2bn in Q1 2013 from ZAR 86.1bn in Q4 2012, as merchandise exports rose 11.9% q/q to ZAR 800.1bn, while merchandise imports grew 8.2% q/q to ZAR 948.2bn. Net gold exports, which also form part of the trade balance, rose 15.1% q/q to ZAR 69.9bn as recovery in the volume of net gold exports fully offset a 2.8% decline in the average realised rand price of gold. At the same time, the deficit on the services and current transfer account narrowed 7.7% q/q to ZAR 112.7bn, reflecting improved travel and dividend receipts from abroad.

SARB said that the current account deficit was fully financed by a sizeable inflow of foreign capital in Q1 2013, registered against the backdrop of nominal interest rate differentials with the mature economies that continued to favour South Africa. Foreign direct investment into South Africa changed from an outflow of ZAR 1.4bn in Q4 2012 to an inflow of ZAR 12.9bn in Q1 2013, as the capital inflow came mainly from long-term loan financing extended by foreign parent companies to their domestic subsidiaries.

SARB official Johan van den Heever told a news conference that the current account gap should shrink further given the expectation that the weaker rand would lead to lower imports.