SA’s exchange rate policy back in the spotlight

According to Minister in the Presidency Collins Chabane*, the government is ready to announce a plan to help stabilise the exchange rate.

The comments, made at a press conference on Friday, could mean the rand trades nervously ahead of Wednesday’s Budget announcement.

Our [Standard Bank] sense is that the likelihood of a major change in FX policy is modest, on the view that it would first be necessary for the economic policymakers within government to agree a single policy course. As far as we are aware, that has yet to happen. Still, it is worthwhile quickly reviewing the most obvious of the options available to the government.

In crude form these are: do nothing, look to moderate investment flows, or peg.


Of the options, we would characterise any move to peg the rand or to impose barriers on portfolio flows as the least likely. For a peg, the classic questions are: at what level do you peg, and do you have the resources to see the peg through? South Africa’s economic fortunes differ from China’s for a host of reasons well beyond the exchange rate policy.

What of an effort to stem the volatility in currency through leaning against portfolio flows in the same style as Brazil’s recently imposed tax? As compared to Brazil, South Africa not only has a much higher financing need but also a much higher reliance on portfolio flows for that financing. Successfully stem the portfolio inflows and without an offsetting increase in South African savings, any shortfall in the flow of these foreign savings into South Africa would have to be matched with a decrease in the country’s ability to support investment spending.

That leaves two other options. One is maintaining the status quo, with Minister Gordhan simply announcing that expert groups would continue to look into the issue of bringing down rand volatility. The other would be a further relaxation of exchange controls.

Though we believe that the impact on the currency was ultimately small, one idea is that by allowing South African companies and residents to more freely swap between local and foreign assets, the sharpest of currency movements can be tempered as locals are encouraged to see through the short-term noise of global currency moves and take the opposite side of the trade. There is some support for this in countries like Turkey, where residents actively manage their FX exposure and are often a source of hard currency during periods of local currency weakness. Neither of these last two options (“status quo” and “excon”) are likely to have a short-term impact on the currency, in our view, but either is far more likely than a more aggressive FX policy change (“portfolio flows” or “peg”).

Source: Standard Bank

*Collins Chabane is Minister in The Presidency responsible for Performance Monitoring and Evaluation as well as Administration in the Presidency