So Gill Marcus says the Reserve Bank won't intervene in the currency market, even though everyone in power acknowledges that the strong rand is draining SA's export earnings by the day.
Lower earnings mean that more jobs have to be cut and hence consumer spending falls. Squeezed profits also translate into lower tax receipts and thus less money for government to spend. It's a rotten circle that's hard to fix.
Apologists for the Reserve Bank's hands-off approach say that if the bank is seen to be subtly trying to manipulate the foreign exchange market, the big global speculators will have a field day. The rand will be fair game for short-selling and governor Marcus will run out of ammunition to defend it long before the likes of George Soros have finished mopping up their profits.
Others, who mainly come from the left but lately include a number of high-profile mainstream economists, say SA's hardline monetary policy is self-defeating. Miners and manufacturers are bleeding money and shedding jobs as a result of it, and sticking to the same old line isn't going to make things any better.
They say the orthodox mandate of a modern central bank - to manage inflation within defined limits - is outdated. It's surely time to include within the bank's ambit the explicit imperative to wrench the economy out of recession. And if this requires the rapid depreciation of the currency, too bad.
We might as well take our cue from the mighty US. The Fed has committed itself to keeping interest rates at record-low levels until at least the latter part of 2010. By printing bakkie-loads of cash and lending it cheaply to investment banks, so they can drive up the traded prices of listed assets, the Fed has stimulated at least some form of economic activity. Everyone hates the likes of Goldman Sachs, but at least the banks are generating taxable earnings.
The second effect of the Fed's weak-dollar policy has been to shore up the balance sheets of America's exporters. There has been a renewed flow of money into US-based multinationals that earn substantial amounts of hard, non-dollar currencies from their offshore operations.
The most pertinent result of the cheap-money policy to us as an emerging market has been to push down the worth of the dollar. It has enabled traders to borrow dollars for next to nothing and invest them for fat yields in places with high interest rates, like SA. This demand for rands has driven our currency to a level that makes it painful for our exporters (the stronger the rand, the more expensive and less competitive their products become on the open market).
We have to ask why SA is stubbornly bucking the global trend by keeping its interest rates high and therefore inviting the carry-traders to keep buying rands - with all the collateral damage that entails. It's time to forget inflation targeting; it has caused too much pain already.
The world will be operating in a low-interest rate environment for at least the next 12 months. SA should make a bold effort to join the global recovery efforts. Cut the repo rate to 6%, let the rand weaken to R10/$, and at least try to reap some windfalls before they disappear altogether.
Source: Sunday Times
It appears that there is not a linear relationship between interest rates and the exchange rate in South Africa - thus monetary policy is not a useful tool for influencing the exchange rate.
ReplyDeleteSouth Africa does not have the reserves to maintain the Rand exchange rate at a particular level, and it will be speculated against - as was Sterling in the eighties when the Bank of England tried to control the Sterling exchange rate. Unfortunately, the rand is like a yacht bobbing around on a sea dominated by large ships!
It may be noted that China maintains the exchange rate of the Yuan, which is not a freely traded currency, and is supported by China's large US Dollar reserves.
The US maintains a large deficit, and its debts are denominated in USD - its own currency. Unlike the USD denominated debts of SA and most other deficit countries.