In the run-up to the G20 meeting being held in Russia, developing nations have been battling to find ways to halt the rout of their currencies.
Despite efforts such as the tightening of capital controls by the likes of India, it remains to be seen how far emerging markets can go to shore themselves up against more bad weather.
But, for South Africa, any steps short of fixing local economic fundamentals would be little more than temporary, according to economists.
President Jacob Zuma joined calls from other emerging market leaders for more “carefully considered global collective action in response to the crisis” earlier this week.
The turmoil has seen the rand plummet over 18% against the dollar this year, followed by the Indian rupee at about 17%, the Brazilian real at nearly 15% and the Turkish lira at close to 13%, according to a report by Stanlib.
This is in part thanks to indications by the United States Federal Reserve that it could begin slowing quantitative easing — the purchasing of assets such as mortgage-backed securities and government securities.
The author and investment banker James Rickards argued last week that emerging markets could consider imposing capital controls, in an environment where developed market central banks have heavily manipulated the world economy.
Cause of the rapid flow of capital
The ramp-up in liquidity by quantitative easing, as well as efforts to keep interest rates at all-time lows, resulted in a rapid flow of capital into emerging markets by investors seeking higher yields.
Although many emerging markets benefited from this, they have been left vulnerable to the volatility of these flows.
But capital controls — measures taken by countries to limit the flow of money into or out of their economies — distort asset prices and currencies, and limit integration with the global economy, according to Sanlam Investment economist Arthur Kamp.
“The emerging markets’ success story to date has been about greater integration with the rest of the world, not dislocation,” he said.
South Africa has been reducing foreign exchange controls steadily on residents since the dawn of democracy and the possibility of a policy reversal is remote, according to the Standard Bank chief economist Goolam Ballim.
“This does not suggest that policymakers will sit by idly and watch the rand rot and the economy weather,” he said.
Concerns voiced by emerging market leaders, including Finance Minister Pravin Gordhan, were helpful, said Ballim, as it made developed world policymakers conscious of the impacts their monetary policies had on emerging markets.
The South African Reserve Bank could contemplate increasing interest rates to lure foreign investors seeking a higher yield, but it is highly unlikely and would be “deeply punishing” at this stage in South Africa’s business cycle, he said.
Ultimately South Africa has to get key fundamentals right, Kamp said, as anything else was “temporary”.
Like many of the emerging economies suffering currency volatility, South Africa has a high current account deficit and a high budget deficit.
Turkey’s current account deficit is just under 7% of gross domestic product, while South Africa’s is at almost 6% and India’s at well over 4%.
Government-led consumption is at historic highs and the current account deficit was being financed by inflows by foreigners seeking yield, Kamp said. South Africa had to increase its domestic savings, improve productivity and reduce the budget deficit, he said.
Government still worried
The treasury spokesperson, Jabulani Sikhakhane, said the government remained concerned about extreme currency volatility.
“Past experience shows that interventions in the currency markets are costly and their success is never guaranteed,” he said.
South Africa’s economy is small, open and the rand is among the most highly traded currencies in the world, with a daily turnover of more than $15-billion, and more than 60% of rand trades are settled outside South Africa.
For this reason, in the event of shocks to the economy, a flexible exchange rate is a useful adjustment mechanism for restoring equilibrium.
Sikhakhane said volatility, rather than the level of the currency, creates uncertainty for investors.
The government has prioritised measures to reduce currency volatility, including the gradual accumulation of official reserves, the co-ordination of efforts to reduce tensions in the mining sector and the gradual reduction of the fiscal deficit, he said.
But, Ballim said, the extensive decline of the rand in recent weeks suggests that, in some respects, the bad macroeconomic news on the local front has been priced in.
More negative news from the developed world could post further risks to the rand, he said, but any further declines were unlikely to be at the same magnitude seen in 2001 when the rand fell from R7 to historic lows of R13.36 to the dollar..