South Africa compares well to its emerging market peers in trade stakes, and while the world can sometimes feel like there’s a lot more bad news than good right now, the latest research paint “a relatively benign picture” of emerging market trade balances this year.
The Institute of International Finance (IIF) released an analysis this week that quantifies emerging market trade balances to gauge their external risk and finds that in most cases trade balances are better or similar at the start of 2019 before the pandemic does not strike.
In total, the IIR attributes higher imports than before Covid-19 to the economic recovery and high global inflation, but fortunately the strong exports exceed imports overall.
South Africa leads the pack in exports as it has achieved on an annualized basis compared to its pre-Covid annual period and has the second largest trade balance in the emerging market universe, surpassed only by Peru .
Of course, South Africa’s trade balance has been lifted mainly by a rising tide in commodity prices and, with commodities contributing over 70% of total exports, its trade fortunes will inevitably depend on the development of its main commodity exports over the coming year. These include coal – which will continue to benefit as long as the global energy complex remains under pressure – iron ore, platinum and gold.
In April, Investec chief economist Annabel Bishop said commodity price performance over the past month had been mixed. Energy prices continued their bull run, metals mostly down and food prices mixed, but all are up year over year.
Thus, the country should benefit from higher prices for palladium, rhodium, iron, coal and food exports – and a moderation in oil prices will also help South Africa’s trade balance in the second quarter.
The effect of rising commodity prices could be even more prolonged because, as the World Bank points out, “global patterns of commodity trade, production and consumption (have changed) from a way that could keep prices high for years.”
“Many countries are turning away from Russia as a supplier of coal and oil and have found alternatives in more distant places.”
In McKinsey’s latest report, War in Ukraine: Twelve disruptions that change the world, one of which is defined as: The race for critical materials, equipment and products is heating up. They say that prices for some materials appear to have stabilized recently, other changes may be in store. Ultimately, the consultant believes that a balance is likely, “but at prices potentially higher than today”.
Rising or still-high commodity prices could further widen South Africa’s lead over Turkey, India and Colombia which, according to IIF research, have “more significant”, as evidenced by their trade flows. He assesses the external risk as the highest for Turkey and the lowest for India.
In Turkey, the government’s devaluation of the lira did not have the desired effect as imports continued to exceed export volumes. The IIF notes that government policies are too expansionary to correct the country’s external imbalances and that its trade outlook is “very unstable”.
Meanwhile, India is expected to have a current account deficit of over 3% of GDP due to a trade deficit in the first four months of the year which is the largest since 2013. But the IIR says the outlook is not alarming “but likely signifies continued pressure for rupee depreciation.”
Overall, the IIF believes that 2022 will not be a year of widespread emerging market current account deficits. “In many cases, trade balances are doing better than before the Covid crisis, when current account deficits were already moderate.
“We think global growth will be hit hard by the war in Ukraine and China’s slowdown, which is not good for commodity prices and emerging market exports. However, weak growth will also weigh on imports. Overall, we think current account deficits will be manageable even if growth and commodity prices slow significantly.
Longer term, the business outlook is much more complex.
Bishop reminds us that The WTO has warned of the longer-term impacts of the fragmentation of ‘geopolitics-based trading blocs’, the reorientation of supply chains (onshoring), the ‘shrinking’ of global GDP in the long term of about 5 (%)”, as “restricting competition and stifling innovation” harms globalization.
External balances are a key determinant of capital and portfolio flows into a country and, fortunately, on this measure, South Africa appears much more stable than its BRICS partners.
Not only has it recorded a significantly positive trade surplus since the first quarter of 2020 and a current account deficit that steadily narrowed from 2013 to 2020 when it moved into surplus, but it has achieved these improvements despite its internal economic challenges and the historic disruption caused by the pandemic.
So when investors turn their backs on emerging markets during the inevitable bouts of risk aversion sentiment that await them as long as macroeconomic and geopolitical uncertainty prevails, hopefully South Africa’s exceptional trade performance will play to its favor. BM/DM