By Mfuneko Toyana and Olivia Kumwenda-Mtambo

JOHANNESBURG (Reuters) – South Africa’s current account deficit narrowed more than expected in the second quarter, data showed on Tuesday, supporting Finance Minister Pravin Gordhan’s view that Africa’s most industrialised economy was not in “recession territory”.

South Africa has a better than 50 percent chance of avoiding a downgrade of its credit rating to “junk” status this year, Gordhan told business leaders in Johannesburg on Tuesday. He also pledged to stick to deficit targets set out in his budget in February, despite weak economic growth.

He warned, however, that surprising economic growth of 3.3 percent in the second quarter could not be sustained and pledged continued fiscal prudence, a key recommendation by ratings agencies.

“The next year or so is quite critical, not just for ratings but for ourselves as an economy and as a country as well,” Gordhan told business leaders.

South Africa’s current account deficit narrowed to 3.1 percent of GDP in the second quarter, better than the 3.6 percent predicted by analysts and down from 5.3 percent in the first quarter.

“The recent data has certainly reduced the chances of a downgrade. It’s gone from more or less inevitable to being a possibility,” said John Ashbourne, Africa analyst at Capital Economics.

The rand pared losses after the data were released. It had dropped as much as 1 percent in early trade, following a warning by Deputy Finance Minister Mcebisi Jonas that a police investigation into Gordhan was causing economic uncertainty.

Gordhan declined last month to obey a police summons linked to the inquiry into whether he had used a tax service unit to spy on politicians, including President Jacob Zuma. Gordhan said he had done nothing wrong and his supporters have called the investigation a witch hunt.

Divisions within the African National Congress have widened since the ruling party suffered its worst-ever local election results last month. Analysts say the rifts result from a power struggle between Zuma and Gordhan.

Zuma is due to appear in parliament at 2 p.m. (1200 GMT), where he expected to be questioned about alleged rifts with Gordhan and his relationship with the Guptas, a wealthy family.

“It does destabilise, not only Treasury, it creates uncertainties across the economy,” Jonas told 702 Talk Radio. “We feel confident there is no basis for the allegation. We are not worried about that.”

Jonas also said he had met Public Protector Thuli Madonsela, an anti-corruption watchdog, as part of her inquiry into whether the Guptas have been influencing high-level political appointments.

Jonas dropped a political bombshell earlier this year when he said the Gupta family offered to secure him his boss’s job.

Zuma has said that the Guptas are his friends but denies doing anything improper. The Guptas have also denied making job offers to anyone in government.

(Writing by Joe Brock; Editing by Larry King)