As the rand hits an all-time low, Reserve Bank governor Chris Stals tells the M&G that he has no intention of resigning, reports Madeleine Wackernagel
Massive dollar buying at home and abroad — not his impending resignation — was behind the rand’s plunge to record lows against the deutschemark and sterling this week, says Dr Chris Stals, governor of the Reserve Bank.
“Mostly it was foreign banks seeking to cover their positions and bailing out of the rand,” says Stals. “There is still some nervousness in the markets. The danger in the present situation is that it attracts more and more speculators and becomes more difficult to control.
“We must get some stability back into this market.”
That looked a long way off, as the rand traded at R7,006 against the pound and DM0,3274 at the time of going to press. The danger now is that the money market shortage, already at about R8,5-billion, will worsen further, putting unwelcome pressure on interest rates.
Stals was philosophical: “The Finance Minister [Trevor Manuel] and I are monitoring the situation closely. Obviously we would prefer rates to remain unchanged, but if the situation deteriorates further, there may be no alternative. Let’s hope the market stabilises before that becomes necessary.”
The sudden storm in the currency markets after the relative calm of the past two months exposes the underlying concerns about South Africa, whether it be over fears of Stals’s resignation or uncertainty over the government’s ability to implement its growth strategy in the face of trade union opposition.
“It is perplexing,” says Stals. “What more can I do? I have reassured the markets time and again that I have absolutely no intention of resigning, yet they keep riding this horse. But the rumours feed into foreign fund managers’ broad uncertainty about the economy, exacerbating the volatility.”
The shift in emphasis from the domestic market to foreign players, who fear the worst if Stals quits, is worrying. “The attitude among the international banks is `Better the devil you know’,” says an analyst. “From a foreign point of view, for Stals to quit would be a disaster. They see the dollar easily going to R5.”
Dr Azar Jammine, chief economist at Econometrix, concurs: “Stals’s resignation is an important factor in the currency weakness, but in addition, as long as the government is committed to doing away with exchange controls and fails to act, the markets will continue to test the level at which residents will not be tempted to take their money out. At a rate of R4,50 to the dollar, a nest-egg overseas is still attractive; at R5 it may be less so.”
Stals disagrees: “Speculators will always push a market if they see a chance for a quick profit. Foreigners understand this; they advise us to go slow. We must be careful and not act too hastily.”
In the short term at least, it’s “fasten your seat- belts time”, says Nick Barnardt of BoE NatWest. The current account deficit results in a daily shortage of dollars, and while in theory interest rates and the currency have moved sufficiently to correct the trade gap, there is always a time lag, with the danger that the exchange rate overshoots.
“We are into a risk period now. Things may become considerably worse than necessary to reach equilibrium.