Gordhan and manufacturers meet over currency

Finance Minister Pravin Gordhan this week met key manufacturers to discuss their calls for the government to weaken what they say is an overvalued domestic currency, the ministry said.

South Africa's government and the central bank have expressed concern that the strong rand currency could hamper a recovery among both exporters and importers following last year's recession.

Gordhan "held constructive talks with representatives of the manufacturing circle on Tuesday ... to discuss their calls on government to intervene in the financial markets to weaken the rand against major currencies," the Finance Ministry said in a statement on Wednesday.

Pitching the Rand

FNB Comment, by Cees Bruggermans

There is much clamouring for a weaker Rand.

Indeed, why stop at fair value (reckoned at 8.50:$) if you can get 9:$ or 10.50:$? Why not go straight to 15:$ and feel really rich (for a while, at least, until you want to replace the car, buy a tractor, drive them or do other exotic things with imports, like generate electricity and stuff).

There is also much clamouring for higher wages.

The rand debate

The strong rand clearly is doing damage. Economic Development Minister Ebrahim Patel has promised a thorough and open debate on the rand. Although we had the rand debate before, it is different now:

• SA has now built up fairly substantial foreign exchange reserves - of USD 40bn at last count - so that it has the wherewithal, at least in theory, to intervene in forex markets. Until about six years ago the reserve position was a net negative, a legacy of the huge losses the Reserve Bank sustained when it intervened in the market to try to prop up the rand in the late 1990s. Memories of that debacle loomed large in earlier years, making policy makers reluctant even to discuss intervention - and markets wary of any suggestion that SA might try to intervene again. 
•  The inflation-targeting regime is now well established, but in the early 2000s was still fairly new and its credibility not fully established. So it was seen as important to emphasise there was only one target for monetary policy - and that was inflation, not the exchange rate.

Today, the options for intervention, and the risks, haven’t changed that much. So even if there were agreement that the rand was overvalued, what would we do about it?

Much of the debate lately has focused on what might be called direct intervention - pegging the rand. Apart from the formidable risks involved, what would one target? Supporters of fixing tend to assume it would be the rand-dollar exchange rate, but in a world of volatility, where the dollar is moving rapidly against other currencies, pegging the rand-dollar might not have the effect expected.

More acceptable to markets, and possibly less risky, would be indirect interventions designed to influence the value of the rand, by buying dollars to build reserves or by influencing capital flows in or out of SA. The Bank has long had a policy of “creaming off” dollars in the market to add to foreign reserves

Economists have often called for the Bank to buy dollars more aggressively. But building reserves has a cost, because it has to print rands to buy the dollars, creating excess liquidity in the market that the Bank then has to “sterilise”, not only to prevent this liquidity from causing inflation, but also because the way the Bank conducts monetary policy depends on it keeping the market slightly short of rands. Sterilisation has a cost, as to remove those excess rands from the market the bank must issue bonds or debentures on which it pays interest.

One solution for this is the sovereign wealth fund idea, that instead of buying dollars or euros and holding them as low-yielding reserves, the authorities could make higher-yielding investments in foreign equities or properties or whatever it is a sovereign wealth fund should be invested in. However, there’s no guarantee stronger foreign reserves, in whatever form, will necessarily weaken the rand. Past experience suggests they could have precisely the opposite effect.

Much the same goes for other kinds of indirect intervention. In theory, encouraging money to flow out by loosening exchange controls should weaken the rand but in practice, the rand has strengthened since Finance Minister Pravin Gordhan announced further relaxation in his October budget.

One idea being floated is that the government employees pension fund - which, unlike private pension funds, is not allowed to invest up to 20% of its assets abroad - could be given the go-ahead to do so, potentially releasing more than R100bn to flow out of SA. But economists on the left increasingly are calling not for the government to encourage outflows but for it to discourage short-term inflows - by means such as the tax that countries such as Brazil have imposed on foreign investors. Given SA’s need for investment, and its inability to finance it from domestic sources, this hardly seems the moment to deter foreign investment.

Source: Business Day

Reserve Bank is not intervening in rand rate

SA’s gold and foreign exchange reserves increased 1,8% last month, lifted mainly by higher gold prices, and showing that the Reserve Bank did not step up its buying of foreign currency despite hefty gains in the rand.

The rand’s sustained rally this year has fanned concern about its negative effect on SA’s tentative economic recovery, fuelling calls for the Bank to take steps to weaken the currency.

But Bank data yesterday showed that it was sticking to its stated policy of letting markets determine the level of the rand. Gross gold and foreign currency reserves rose to 40,5bn from 39,8bn, in line with forecasts.

During the month, the rand rallied 6,4% to R7,28/USD , adding heat to a growing debate about its effect on the competitiveness of local exports.

Bank officials have repeatedly said they would continue to build reserves when market conditions allow, without affecting the value of the currency.

However, analysts have speculated in the past that the Bank buys foreign exchange more aggressively when the rand is a bit too strong for comfort.

“In our view, there is little, if any, indication of Reserve Bank activity in the market aimed at influencing the level of the rand or actively trying to bolster reserves,” said Absa Capital macro strategist Ian Marsberg. “We maintain our view that the Bank will continue to focus on its inflation targeting mandate rather than actively trying to manage the currency.”

Strength in the rand — which has appreciated 19% against a trade- weighted basket of currencies so far this year — has benefits as well as drawbacks. One is that it curbs inflation by making imports less expensive, and helps ease the costs of the government’s huge infrastructure spending programme.

The rand’s drop in the past week has highlighted the potential dangers of intervention to keep the currency at a given level.

Since taking office a month ago, the Bank’s governor Gill Marcus has repeatedly said it would not be “appropriate” for it to intervene to influence the level of the rand.

But she and Finance Minister Pravin Gordhan have also voiced concern over its strength, given that SA is just starting to emerge from its first recession in 17 years.

Economic Development Minister Ebrahim Patel is overseeing talks between labour and business on the perceived damage done by rand strength . “There’s a complex trade-off between policy changes … we are identifying the costs and benefits of each one,” he said last week.

The rand has been buoyed by foreign buying of local shares and bonds, which are at a net R66bn so far this year, up from R53,4bn in the year-earlier period.

Source: Business Day