C/A deficit at 5-year low

Pretoria - The deficit on South Africa's current account narrowed to its lowest level in more than five years in the second quarter of 2009 as recession kept imports down, easing pressure on the trade balance, the central bank said on Thursday.

The bank said in its September quarterly bulletin the shortfall narrowed to 3.2% of GDP - the lowest it has been since the first quarter of 2004 - from 7.0% in the first quarter of the year.

The second quarter deficit amounted to R73.1bn compared to a R163.7bn gap in Q1.

Economists polled by Reuters last week forecast a current account gap of 4.8% of GDP.

"The contraction in domestic economic activity since the middle of 2008 has ... had profound positive impact on the shortfall on the country's services, income and current transfer account with the rest of the world," the central bank said.

An upturn in investor sentiment towards emerging-market assets lifted foreign portfolio investment inflows to R29bn in the second quarter from R10.1bn in the previous quarter.

The bank said subdued domestic demand and weak business and consumer confidence levels led to the third consecutive quarterly decline in the volume of merchandise imports, which fell by 15.5% in the second quarter.

The volume of exports contracted by a marginal 2.8% in the same period, as increased demand from especially Asia for domestic mining products offset lower export orders from Europe and the United States for locally manufactured products.

The report also showed South Africa's real gross domestic expenditure fell by 14.5% year-on-year in the second quarter, after growing by 2.2% in the first quarter, weighed down by a fall in household consumption.

Household consumption contracted further by 5.8% in the second quarter after falling 4.8% previously, mainly due to lower expenditure on durable goods.

The data shows debt-ridden households are still reluctant to spend in the current harsh climate, despite 500 basis points of interest rate cuts since December last year as the central bank sought to ease pressure on the economy, in its first recession since 1992.

The cuts have completely reversed rate increases effected in the two years to June 2008 as the central bank grappled with annual consumer inflation, which remains above a 3%-6% target band at current levels of 6.7%.

"The deterioration of expenditure behaviour... could be a reflection of the lagged effect of the recent monetary policy relaxation, accompanied by low confidence levels of consumers and business enterprises," the central bank said.

Trends also showed households were more averse to debt while lenders were more averse to risk, the bank added.

In an annual report also released on Thursday, the central bank said it would continue to pursue its objective of achieving and maintaining price stability "within a flexible inflation-targeting framework."

The bank has previously said inflation is likely to sustainably fall back into target in the second quarter of 2010.

- Reuters