South African exports increased to an impressive new record in 2021. After languishing at a level of around one trillion rand the previous five years, total exports increased by a whopping 61% to a level of R1.7 trillion, reversing a downward trend that started in 2018.
Although 2020 witnessed a recovery of 8% over the 2019 figure, it was still below the value of total exports in 2017. Import trade also took off in 2021, rising by 49% to just above R1.3 trillion.
In the process, South Africa’s trade surplus more than doubled to R336 billion. Before 2020, South Africa had experienced nine successive years of sizeable trade deficits, but a rejuvenated upward phase of the commodity price super-cycle has propelled the country’s foreign exchange earnings to unimaginable new heights.
The healthy increase in the level of imports is a clear sign that economic recovery is gaining momentum. The bulk of South Africa’s imports consists of oil, machinery & equipment and intermediate inputs for the manufacturing sectors. Import growth is therefore closely correlated with GDP growth.
It is clear that South Africa continues to benefit from high international demand for a variety of its export products. Combined with a continuation of the upward phase of the commodity price super-cycle, this has boosted mineral and metal exports to new record levels.
In combination, minerals and precious metals represent more than 52% of total exports. When the other five key export groups are added (see the table), this share rises to 95%.
The Minerals Council of South Africa has repeatedly urged government to incentivise new exploration activities in mining, as well as the local beneficiation of the country’s abundant mineral resources. This option holds significant potential for further economic development, employment creation and value added export growth, but it requires some appropriate policy initiatives from the relevant government departments.
Rand resilience
Although the rand exchange rate remains as volatile as the currencies of most of its emerging market peers, it continues to bounce back after every bout of weakness. Analysts should not forget the basic laws of supply and demand when assessing current and future currency trends and the record trade surplus represents the main reason for the resilience of the rand.
Sound prospects for a continuation of sizeable net export earnings are based on two key considerations. Firstly, the New Year has brought cheer to the South African mining sector, with the prices of most mineral and metal export commodities resuming an upward trend.
The prices of three of the country’s main export earners, iron ore, gold and platinum, have risen by 72%, 38% and 24%, respectively, since the beginning of 2019 (pre-Covid).
A second issue concerns the likelihood of a reversal of large outflows of portfolio investment from South Africa. Between 2011 and 2015, non-residents were net purchasers of South African bonds & equities, albeit only marginally so.
During the next five years, the effects of state capture, near stagnant economic growth and declining levels of business confidence resulted in average annual net sales to the tune of more than R26 billion, rising to almost R40 billion last year alone.
In sharp contrast to several key stock markets around the globe, including South Korea, Brazil, Japan, Australia and the US Nasdaq, the JSE all share index has continued its relentless rise to new record levels during January, suggesting that global fund managers have woken up to the discounts on offer in South Africa’s premier equity market.
These discounts are substantial and can be quantified in terms of low price/earnings ratios and high dividend yields for a large number of blue chip shares.
A continuation of a solid export performance is on the cards and should continue to provide a solid platform for the rand, whilst also assisting with the further recovery from the pandemic.