The Sustainability of South African Current Account Deficits

Deficits in the South African current account since 2003 have been met with growing concern by economists. As these deficits reached unprecedented levels, questions about the sustainability of the country's external position have begun to arise. This paper tests the sustainability of South Africa's current account deficits via a test of the country's intertemporal budget constraint. Following a similar methodology to Husted (1992) in testing for the sustainability of U.S. current account deficits and Wu, Fountas and Chen (1996) for U.S. and Canadian deficits, this paper employs the Engle and Granger (1987) ADF test for cointegration. An initial finding of an unsustainable current account position is reversed once structural breaks at 1994:1 and 2003:2 are controlled for in the cointegration equation. This investigation therefore concludes that South African current account deficit is sustainable.