South Africa Inflation Slows, Current Account Gap Narrows

South African inflation slowed for the first time in five months, while the current account deficit unexpectedly shrank, improving the outlook for Africa’s largest economy.

The inflation rate fell to 5.6 percent in May from 5.9 percent in April, the statistics office said today, lower than all of the 19 estimates from economists surveyed by Bloomberg. The gap on the current account, the widest measure of trade in goods and services, narrowed to 5.8 percent of gross domestic product in the first quarter from 6.5 percent in the previous three months, the Reserve Bank said in its Quarterly Bulletin released in Pretoria, the capital.

The better-than-forecast data eases pressure on the central bank to raise interest rates to contain inflation and attract foreign capital.

“There is consequently no need for any interest rate hikes,” Annabel Bishop, a Johannesburg-based economist at Investec Ltd. said in an e-mailed note to clients. Today’s data “lowers the trajectory for consumer prices inflation for the remainder of 2013 and the start point for 2014.”

The central bank has kept the benchmark lending rate at 5 percent since July last year. The combination of high inflation and low economic growth left the central bank “limited room for maneuver,” South African Reserve Bank Governor Gill Marcus said on June 6.

Inflation eased last month as gasoline prices in Gauteng, the nation’s commercial hub, fell on May 1 by 5.5 percent, the biggest drop since July, after oil declined. Inflation is forecast to average 5.8 percent this year, down from a previous estimate of 5.9 percent, and exceed the bank’s 3 percent to 6 percent target in the third quarter, Marcus said on May 23.

Rand Weakness

“We believe that rates will remain at current levels for the rest of this year,” Nedbank Group Ltd, the country’s fourth-largest bank said in e-mailed note to clients. “The MPC will need to strike a balance between high inflation and still poor economic growth outcomes.”

While the rand’s 15 percent slump against the dollar this year has stoked inflationary pressures, it has also increased the competitiveness of the country’s exports.

“The export earnings of South African producers continued to benefit from the lower exchange value of the rand, which extended into the first quarter,” the central bank said in today’s report. “South Africa’s terms of trade improved somewhat in the first quarter of 2013 as export commodity prices held up well relative to the prices of imported goods and services.”

Increased Exports

The rand erased declines after the release of the inflation and current-account data. It traded at 9.9333 per dollar at 11:38 a.m. in Johannesburg, up from 9.9916 late yesterday. Yields on government bonds due September 2015 fell 14 basis points, or 0.14 percentage point, to 6.12 percent.

The current-account gap was narrower than the median estimate of a 6.9 percent shortfall and all 15 estimates in a Bloomberg survey.

Increased exports will help offset the effect of series of strikes that the National Treasury says shaved about 0.5 percentage point off gross domestic product last year and a further 0.3 percentage point this year. Sluggish growth is making it harder for Finance Minister Pravin Gordhan to rein in the fiscal deficit, a concern raised by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings when downgrading South Africa starting in September.

The economy expanded an annualized 0.9 percent in the first quarter, the slowest pace since a 2009 recession, and less than the 7 percent rate the government says it needs annually through 2020 to cut the jobless rate to 14 percent from 25 percent.

Risk Perceptions

South Africa relies mainly on foreign investment in stocks and bonds to fund the current-account deficit, inflows that have fluctuated this year as investors’ risk perceptions increased.

The gap was adequately financed by foreign inflows last quarter as foreign direct investment rebounded, the central bank said.

Investment in stocks and bonds by non-residents slowed to 1.4 billion rand, compared with 12.5 billion rand in the final three months of the year, the central bank said. South Africa recorded 12.9 billion rand in foreign direct investment compared with an outflow of 1.4 billion rand in the previous three months.

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