S.Africa vulnerable to low investor confidence: OECD

PARIS (Reuters) - South Africa is vulnerable to a worsening of investor confidence due to reliance on portfolio flows to finance its current account deficit, the OECD said on Thursday, adding it sees a return to growth in the fourth quarter.

The government has forecast the economy will contract by 1.9 percent in 2009, but has also predicted the country will exit its first recession since 1992 in Q4, aided by improved global demand and expansionary policies as it prepares to host the soccer World Cup next year.

In its latest economic outlook, the Organisation of Economic Co-operation and Development (OECD) said Africa's largest economy should press on with a planned increase in public spending in 2010, but this should be on a sustainable medium-term basis.

"The World Cup will provide an impetus to activity in the first half of 2010. Consumption and business investment should gradually pick up as confidence returns," the OECD said, warning however:

"South Africa remains vulnerable to a worsening of investor confidence, given its reliance on portfolio flows to finance the sizeable current account deficit."

South Africa's current account shortfall is seen narrowing to 4.9 percent of GDP in 2009, compared to 7.4 percent last year, but should expand again to 5.7 percent in 2010.

While appetite for emerging market assets in general had picked up and seemed likely to continue to recover, a renewed flight from risky assets remains a possibility.

"Investor sentiment could be hit by South Africa-specific factors, such as growing pressures on the government for the adoption of populist economic policies or the re-emergence of electricity supply constraints," it added.

President Jacob Zuma is under pressure from his trade union and communist allies to shift economic policy to the left, including abandoning such market-friendly policies as inflation targeting.