G-20 allows exchange rates to be managed

Emerging economies — including SA — were the winners at a Group of 20 (G-20) summit meeting in Seoul last week, which gave those with overvalued currencies the go-ahead to manage damaging appreciation.

Opinion was mixed on exactly what the final communiqué meant when it said that developing countries that met the criteria could respond to currency gains with "macroprudential" measures.

It was seen by some as a nod to action taken by countries such as Brazil and Thailand to halt unwelcome gains in their currencies, which erode the competitiveness of local exports.

That is probably incorrect, as the G-20 wants market-determined exchange rates and Brazil has imposed taxes on capital inflows — which is certainly a deliberate devaluation of its real.

But the statement makes it easier for affected countries to come up with creative policies to respond to the vast capital inflows to their markets, which have driven currency gains.

They could also create "asset bubbles", which wreak havoc on economies when they burst.

"This would be the best time to follow unconventional policy measures, but I still question the effectiveness of any such steps," said Adenaan Hardien, economist at Cadiz African Harvest.

The rand has not reacted to the declaration, and is unlikely to do so in the next few months. But it could stabilise in the longer term in response to measures already taken and being considered by the Treasury and the Reserve Bank.

Another notable outcome from the summit was its endorsement of a deal to give emerging markets more clout in the International Monetary Fund (IMF) — a step which SA has campaigned for in the past few years.

The IMF’s MD, Dominique Strauss-Kahn, says the reforms, agreed to by G-20 ministers and central bank governors last month are the "biggest-ever shift of influence in favour of emerging markets and developing countries". They transfer just over 5% of voting rights in the organisation to emerging markets and put Brazil, Russia, China and India — the Bric countries — in the top 10 IMF shareholders.

China moved up from sixth to third place.

Some believe that the Seoul summit did come up with "constructive" proposals to manage the large trade imbalances which undermine global stability and have led to acrimony between the two powerhouses, the US and China.

But the agreements may not lead to concrete policy actions, and are unlikely to alter the forces that have driven the unwelcome currency appreciation in countries like SA and Brazil.

But one thing was obvious — the balance of power is shifting from developed to emerging economies. "It came across very clearly that the G-20 was going to be more receptive to the concerns of emerging markets," said Razia Kahn, Standard Chartered Bank’s head of research for Africa.

Emerging economies are growing much faster than their developed peers, so the change is natural. The final declaration of the G-20 said that countries with adequate foreign exchange reserves and "flexible", overvalued exchange rates could respond, albeit carefully.

"This seems to allow for the actions taken by Brazil and SA so far but specifically does not condone Asian countries ... when their currencies are so overvalued," Nomura said in a research note on Friday.

SA is unlikely to impose taxes on capital inflows, a step which flouts the G-20 aim of market-determined exchange rates. But there are other options which could be deemed "macroprudential" measures.

These would reinforce conventional measures taken by the Bank, which centre on reserve accumulation.

Macroprudential is a banking regulation and supervision concept which means preventing the conditions which could result in financial instability, through public policy.

Financial stability has been officially included in the Bank’s mandate this year, and has been given significant weight by its governor, Gill Marcus. Mr Hardien said intervention could include changing the reserve requirements of local banks, or altering lending rules to prevent asset bubbles.

It also raises the question of whether SA could introduce more favourable credit rules for industries which have been knocked by rand strength.

Nomura says with France now chairing the G-20, it would be likely to "champion" the cause of emerging market countries. "It will be interesting to see whether the currency policy and imbalances debate shifts as a result," it said.

Source: Business Day