Understanding South Africa’s current account deficit: The role of foreign direct investment income

Abstract

This article highlights the prominence of net investment income payments made to foreign direct investors in South Africa’s current account deficit. After a brief history of South Africa’s balance of payments, we describe several factors driving the growth of South Africa’s direct investment assets and liabilities, including the roles of China and Africa as investment destinations and the relisting of major South African companies abroad. The slow accumulation of direct investment assets by South African firms before 2006, coupled with the higher returns on South Africa’s direct investment liabilities, has contributed to an imbalance in the country’s net FDI income, while a compositional shift in the stock of non-FDI liabilities has helped to decrease its payments to non-direct investors. If South African firms continue to invest productively abroad, net FDI income may contribute less to South Africa’s current account deficit in the future. The trade deficit remains a major area of concern.