Insulating South Africa against global risks

In a recent speech, Reserve Bank Deputy Governor Daniel Mminele said that next week’s Q2 supply-side GDP numbers were likely to be “less stellar” than the 4.6% q/q saar growth recorded in Q1. Mminele presented an unchanged 2010 GDP growth forecast from that communicated at the Bank’s last MPC meeting, where it looks for the economy to grow 2.9%.

The deputy governor spent a large portion of the speech discussing the global economic crisis and continued to suggest that “uncertainties emanating from the global economy pose the main downside risks” to this projection.

On the rand, he said that the current low interest rate environment in developed nations had “resulted in a consistent search for yield. As a consequence, South Africa, like other emerging markets, had attracted significant capital inflows, which were supporting the currency.


Global risk aversion related to the difficulties in Europe and volatility in the EUR/USD exchange rate, in his view, were some of the key reasons behind the volatility in the rand. Interestingly, he also pointed out that the volatility in the currency was not a rand-specific story and has been in line with that observed in the currencies of other emerging market and developed nations.

While the SARB’s concerns over consistent levels of rand volatility will remain, the deputy governor also noted that it needed to be recognised that “the open nature of SA’s economy made it more susceptible to all kinds of spillovers from the global economy and financial markets”, adding that “making any attempts to seek to control the exchange rate at a particular level not feasible”. Mminele’s comments, do not change our view on interest rates, where evidence that SA’s economic recovery is proceeding and the upside risks to SA’s inflation outlook in the medium to longer term are likely to warrant the MPC leaving the policy rate on hold at 6.5% at the 9 September meeting – despite a marginally weaker Q2 GDP print.

On the rand, his comments continue to suggest the same rhetoric that we have heard in recent months from a number of SARB officials, who have also expressed concern about the volatility of the ZAR, while at the same time making clear the view that the bank is not in the business of targeting a specific level for the currency.

Source: Absa Bank