The world will be watching when United States monetary policymakers meet next week and pronounce on whether its central bank will begin to curb quantitative easing (QE) — one of the long-standing stimulus measures it has been using to support its economy.
The possibility that it could begin to taper off quantitative easing, as suggested during the June meeting of the federal open market committee, has resulted in substantial pain for emerging markets in recent weeks.
It has indicated that it will be based on the data coming out of the US economy, including the latest figures on inflation and housing.
Annabel Bishop, an economist at Investec in South Africa, says in a research note that an announcement of quantitative easing tapering in September is unlikely to cause any more marked emerging market currency weakness, as the markets have already priced in the likelihood.
If it does not begin this month, tapering is likely to be announced at a federal open market committee meeting later this year.
Bishop says that the South African authorities’ decision to ride out the rand’s volatility has paid off, with the domestic currency only the fourth-worst performer against other emerging market currencies, strengthening against the Indian rupee and Indonesian rupiah.
The impact of QE tapering on emerging markets was a key talking point at last week’s G20 summit.
On his return from that meeting Finance Minister Pravin Gordhan expressed confidence that there was agreement about the interconnectedness of the global market and the effect decisions made by one country might have on others, and that this would guide policy.
When asked whether the US had indicated how it planned to implement tapering, Gordhan said no country could direct another on how to act in terms of policy but “as significant-sized economies, you do need to keep in mind that what you do has to spill over to other countries”.
South Africa is still vulnerable, notably because of its current account deficit, which came in higher than expected this week, at 6.5% of gross domestic product.
The current account, one of the measures of our trade in goods and services with the rest of the world, is financed chiefly by foreign investment in equities and bonds. The wide deficit leaves the currency exposed to investor sentiment.
Nedbank says in a research note that, given the intense scrutiny of countries with large current account deficits, the numbers will hurt the rand, placing upward pressure on inflation. — Additional reporting by Chantelle Benjamin