Johannesburg - South Africa's trade balance swung to its first surplus in 29 months in May as imports fell, helping to strengthen the rand currency which should ease pressure on the inflation.
The central bank unexpectedly paused its monetary loosening cycle that started in December last week, citing inflation concerns, and left the repo rate unchanged at 7.5%.
The trade deficit contributed to the widening of the current account shortfall, which swelled to 7.0% in the first quarter of 2009 due to a sharp drop in exports.
Despite the wide gap, the rand has gained about 19% against the dollar since the beginning of the year, in part due to increasing foreign investor appetite for emerging market risk, but some economists are sceptical of its gains.
The South African Revenue Service (SARS) said the trade surplus was at R2bn for May compared to a deficit of R1.46bn rand in April, with imports falling by 6.35% while exports rose 1.97%.
"Before we get too excited, we should perhaps wait a couple more months for confirmation before we start talking about a significant narrowing in the current account deficit," said George Glynos, economist at ETM.
The rand touched a new 10-month high of 7.67 against the dollar after the release of data, and was trading at 7.70 at 17:53, 1.66% firmer than a previous close of 7.83.
Although central bank Governor Tito Mboweni is uncomfortable with a strong rand, he said last week its favourable impact on inflation was offset by rising administered prices and the international oil price.
Inflation has been outside the central bank's target band of 3% to 6% for two years, and the central bank said last week it was likely to come back to the band in the second quarter of 2010.
Razia Khan, head of research for Africa at Standard Chartered, said the stronger rand, if sustained, was good news for inflation and opened the door for another rate cut.
"We have already seen the impact of the stronger rand in that very strong disinflation trend in PPI," she said. "We believe it's only a matter of time before PPI exert a stronger influence on CPI and yes the rand is going to be important for that."
Further rate cuts?
The Bank cut interest rates by 450 basis points since December on worries about the economy. It almost doubled the number of meetings this year, with its next one scheduled in August.
"We have taken a view that there was room for another cut of 50 basis points with inflation coming down, especially if we continue to see the rand strengthening," Khan said.
"While our (rates) forecast is unchanged from now till 2010, we still acknowledge that there are downside risk to that."
Earlier, separate data from the central bank showed growth in demand for credit in the private sector slowed to 5.7 percent year-on-year in May - a 5-year low - as companies joined households in curbing borrowing.
Brait economist Colen Garrow said the credit data showed lack of activity in the economy and highlighted the need to cut interest rates further.
But Mboweni said last week if it were up to him alone, rates would likely not fall further.
Due to lower rates and a firm currency, consumers were starting to be hopeful that their lot will improve over the next year. First National Bank and the Bureau for Economist research said consumer confidence rose in the second quarter.
Consumer confidence and household demand has been under pressure partly due to higher inflation and to rate increases worth 500 basis points between June 2006 and June 2008.
- Reuters