attitude
Madeleine Wackernagel
The rand retreated from its record lows this week, no thanks to Trevor Manuel’s insistence that the government’s position on exchange controls remains firm.
The finance minister is labouring the point, said one economist. He should have made suitably reassuring noises at the onset of the crisis, and then let the markets get on with it. “The more you say exchange controls won’t be lifted, the more the market expects the opposite. After all, it was proven correct on Chris Liebenberg’s resignation.”
And while some big bang proponents think the time is still ripe to act on controls — with the rand so low there is less to lose, runs the argument — there is a growing belief that the opportunity has been lost.
If the government had acted two months ago, when the rand was trading in the late R3,90 range to the dollar, the effect of liberalisation would have been a certain depreciation, but then a rebound as foreign investors took advantage of the cheap currency and reinvested.
Now, with the prospects for a rand recovery diminishing rapidly and the threat of liberalisation at some time still hanging like the sword of Damocles over the market, investors are adopting a wait-and-see attitude. The currency could tumble further – — a R5 exchange rate is not entirely fanciful — and they are unlikely to buy into this economy only to see the value of their capital dwindle if and when controls are lifted.
South Africa’s structural problems are coming home to roost, says Asghar Adelzadeh of the National Institute for Economic Policy. High interest rates are necessary to maintain the capital inflows, which in turn are needed to offset the current account deficit. This trade imbalance, combined with dwindling reserves, is adding to the currency’s woes.
Short-term capital made up 80% of the total inflows between 1980 and 1994; the economy pays for it in the form of interest on government bonds, unlike investment capital. Having to find these funds adds to market uncertainty, Adelzadeh adds.
But Dennis Dykes of Nedcor says whatever the size of the reserves, a confidence crisis will spark a run on the currency.
What we need now is a period of consolidation, if only on technical grounds, as the market realises the crash has been overdone. After two runs, a stabilisation is typical, and the rand is showing signs of firming.
How long it lasts is anybody’s guess.