The jury is out on how the US’s quantitative easing policy will affect other currencies.
South Africa’s Reserve Bank doesn’t anticipate a sudden stop of capital inflows as central banks in the US, European Union and Japan scale back bond-buying programmes, deputy governor Lesetja Kganyago said.
“South Africa is not a fragile country,” Kganyago said in a copy of a speech posted on the Pretoria-based bank’s website today. “It is equipped to handle a shock like the end of quantitative easing. A flexible currency and rand-denominated debt protect South Africa.”
Africa’s biggest economy relies on foreign capital to fund its current account deficit, which widened to 6.5% of gross domestic product in the second quarter. The country also runs a budget deficit, which the National Treasury estimates at 4.2% of gross domestic product in the year through March 2014.
The twin deficits pose the biggest risk to the economy, which urgently needs to improve its export performance, Kganyago said.
South Africa’s policy isn’t to respond to a weakening currency by defending its value, but rather to target the pass-through to inflation, he said. The rand has slumped 17% against the dollar this year, the most among 16 major currencies monitored by Bloomberg.
“We see little evidence that a more activist and experimental approach would have changed the rand’s direction in a meaningful way,” Kganyago said.
The rand weakened 0.7% to 10.20 per dollar by 5.42pm in Johannesburg. – Bloomberg