UPDATE 2-Weak rand boosts export demand to shrink South Africa current account gap

Wed Jun 19, 2013 9:48am EDT

* Inflation slows, gives central bank more policy room

* Current account shortfall could moderate further

* Concerns focus on wage negotiations, mines unrest

By Stella Mapenzauswa

PRETORIA, June 19 (Reuters) - Higher global demand for its exports unexpectedly shrank South Africa's current account deficit in the first quarter of the year, a trend that could continue if the sharply depreciated rand remains weak.

Consumer inflation for May also slowed more than expected, giving the Reserve Bank more space to keep interest rates at four-decade lows to try to revive flagging growth in Africa's biggest economy.

The shortfall in the current account eased to 5.8 percent of gross domestic product in the first quarter from 6.5 percent in the last three months of 2012, the central bank said in its June quarterly bulletin. Economists polled by Reuters had expected the current account deficit to widen to 7.05 percent.

A pick-up in global economic activity led to an increase in demand for South African exports, mainly commodities and particularly from emerging market economies, with the sharply weaker rand making local producers more competitive overseas, the central bank said,

The smaller gap should buoy the rand, which has fallen by nearly 18 percent against the dollar this year, squeezed by worries about the impact of strikes that have hit mining output since late last year.

After release of the current account data, the currency firmed to about 9.91 per dollar from 9.99 before, while government bond yields fell sharply .

The current account shortfall, which had been a source of pressure on the rand, could moderate further if the weaker currency leads to lower imports, senior Reserve Bank official Johan van den Heever said.

"On the basic expectation that with the lower exchange rate level there will be some moderation in imports, one would expect further decline in the deficit," he told a news conference.

RISK FROM STRIKES

The deficit was financed by a sizeable inflow of foreign capital, as nominal interest rate differentials continued to favour South Africa.

But flows could be disrupted if investors concerned that the U.S. Federal Reserve could scale back its stimulus programme withdraw capital from emerging markets seen as carrying more risk, said Capital Economics analyst Shilan Shah.

"The second (disruption to flows) is heightened domestic political risk during South Africa's wage negotiation season, particularly if it is accompanied by a sudden flare-up of strike action," Shah added.

Africa's leading economy has been hit with waves of turbulent and often deadly wildcat strikes in the mining industry since last year, and there have also been rumblings of labour unrest in other sectors.

South Africa's NUMSA union has declared a wage dispute with the auto retail industry, an official said.

The Reserve Bank said spending in South Africa increased by 3.5 percent in the first quarter after contracting in the previous three months, boosted by government expenditure.

But growth in household spending slowed marginally to 2.3 percent from 2.4 percent, with demand for durable goods such as new vehicles coming off.

A major slowdown in household spending would have a significant impact on growth prospects, said Rashad Cassim, head of the Reserve Bank's research department and a member of its monetary policy committee.

The committee trimmed its 2013 GDP growth forecast to 2.4 percent from 2.7 percent last month, on raised concerns about "fractious labour relations" in the mining sector.

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