The deficit of the current account of the balance of payments narrowed significantly in the second quarter, the SA Reserve Bank said on Thursday in its September Quarterly Bulletin.

The negative balance on the current account of the balance of payments improved from 7.0 percent of gross domestic product in the  first quarter to 3.2 percent  in the second quarter.

This was mainly due to the trade balance reversing into a surplus for the second quarter.

A country's current account is the difference between export and  imports of goods. However, also included in the current account are  payments for services, such as the cost of shipping good overseas, or money earned from tourism, as well as income received or paid to  foreigners.

According to the SARB, the contraction in real gross domestic production and the almost simultaneous steep drop in the volume of merchandise imports in the first half of 2009 led to a turnaround in the deficit on the trade account in the second quarter of 2009 -  despite the relatively subdued external demand for domestically produced goods.

"South Africa's trade balance, which had registered deficits since the third quarter of 2005, consequently switched from a deficit of R53.2 billion in the first quarter of 2009 to a surplus of R26.6 billion in the second quarter," the SARB said.

It added that the contraction in domestic economic activity since the middle of 2008 had also had a profound positive effect on  the shortfall on the country's services, income and current transfer account with the rest of the world.

"Owing to a combination of continued lower net income and other service-related payments to non-residents, the deficit on this account narrowed considerably."

As a result, the current account deficit had narrowed significantly, the SARB said.

It said that the balance on the financial account as a percentage of gross domestic product decreased from 6.1 percent in the first quarter of 2009 to 4.6 percent in the second quarter.

Foreign direct investment into South Africa recorded a substantial capital inflow of R23.9 billion in the second quarter of 2009 compared with an inflow of R11.7 billion in the first quarter, the SARB noted.

"The more than doubling of direct investment inflows in the second quarter of 2009 primarily reflected the acquisition of an additional portion of the shareholding in a South African telecommunications company by a non-resident investor," it said.

The SARB added that as foreign investors' sentiment towards emerging-market assets improved, foreign portfolio investors increased their holdings of South African equity and debt securities by R29.0 billion in the second quarter of 2009 from an inflow of R10.1 billion in the first quarter.

Sapa