BIGGEST CURRENT ACCOUNT DEFICIT SINCE '08

Pretoria - South Africa's current account deficit narrowed marginally but was still worse than expected in the fourth quarter of last year, hit by a weak currency as mining strikes repelled investment, Reserve Bank data showed on Tuesday.

The rand fell to a four-year low against the dollar after the figures, which revealed an economy struggling for growth in the face of subdued local and foreign demand for South African products.

The current account gap was at 6.5% gross domestic product in the fourth quarter of 2012 from a huge 6.8% in the third quarter, a revision from a previous estimate of 6.4%, the Reserve Bank said in its March quarterly bulletin.

While import volumes fell slightly in the quarter, the monetary value increased, largely due to a sharp fall in the rand.

"The nominal effective exchange rate of the rand on balance depreciated in the final quarter of 2012 as domestic constraints and labour unrest continued to weigh on international investor sentiment," the central bank said.

Investors dumped South African bonds and the local currency while credit agencies downgraded the country's sovereign rating in the wake of the often-violent strikes which began in August, hitting output in the key mining sector.

However, the fourth quarter current account gap was covered by financial inflows in the form of short-term loans to local banks and an increase in non-resident deposits.

"Net portfolio investment made a small positive contribution, whereas net direct investment registered an outflow of capital during the quarter concerned," the Reserve Bank said.

Economists polled by Reuters had expected a current account deficit of 6.3% in the fourth quarter relative to the previously stated 6.4% for Q3.

The rand hit a session low of R9.2125 against the dollar after the data - breaching the psychologically key R9.2 level - from R9.1047 before the data was released at 08:00 GMT.

"It is a huge deficit. It is disappointing but it's been financed relatively easily up to now and that's quite important. For investors the issue will be if the deficit can't be financed easily," Citadel economist Salomi Odendaal said.

ETM economist Jana Le Roux said: "It's a dual function of the increased import demand as well as the softer exports, which is keeping the deficit at these uncomfortably wide levels.

"Where the uncertainty comes in is the funding: we have seen portfolio inflows have remained rather strong into the beginning of the New Year, but there's a number of factors which are turning increasingly negative for the rand.

"Social unrest, the mining strikes that we've seen, these deficits that remain uncomfortably large, and we've seen the rand weaken quite sharply to levels previously seen about four year ago so whether or not these inflows will be sustained in coming months is uncertain."

Overall, the deficit on the current account widened sharply to 6.3% of GDP in 2012 from 3.4% the previous year, the Reserve Bank said.

The Treasury expects the wide shortfall to persist, averaging 6.2% over the next three years.

Spending growth in the fourth quarter contracted by an annualised 0.9% after growing by 4.1% in the third quarter, the first decline since 2009 when South Africa was in recession, the Reserve Bank said.

The drop was due to a fall in government spending and a sharp contraction in real inventories.

Growth in household spending, historically a key driver of economic growth, slowed to 2.4% in the quarter from 2.7% previously, constrained by a slow increase in disposable incomes and rising inflation.

Mar 12 2013 11:04 Reuters