Raising interest rates may not be enough to save the rand. Government needs to define a firm strategy for growth, argues Madeleine Wackernagel
When the authorities finally moved to stabilise the battered rand, it was a case of too little, too late. If a hike in interest rates was the solution, the Reserve Bank should have given the market a short, sharp shock at the onset of the currency crisis.
That would have sent a decisive message and given governor Chris Stals the scope to reverse the move quickly, before too much damage was done to the economy.
Analysts agree the Bank had little alternative, but the economy will pay dearly. Growth expectations for this year have been hastily downgraded, while inflation, on the governor’s own admission, is likely to hit double-digits again by the year-end.
For the past two years, South Africa has been basking in post-election euphoria. Within two months, foreign goodwill has all but evaporated and gloom is descending on local investors.
The reason, says Dr Peter Hilsenrath of Syfrets, is that the government lacks a clear economic strategy. “Investors would prefer a market-oriented policy, but at this stage, any plan is better than none. The rand’s slide is not just a vote of no confidence in the government, but also in the private sector. Concern is growing that the economy as a whole is not performing as hoped.”
South Africa can ill-afford to fight inflation at the expense of growth at this stage. Growth is on track for about 3% this year, but is unlikely to top 2,5% next – a far cry from the government’s 6% goal by 1999. Instead of a benign and moderate slowing, expected before the rate rise, that downphase has now been speeded up, says Dr Ben van Rensburg, economist at the South African Chamber of Business.
Blaming cabinet changes, exchange controls or the Cosatu strike for the currency’s instability is to ignore the fundamental structural problems in the economy. Foreign investors, says Dennis Dykes, chief economist of Nedcor, will put up with anything as long as growth is strong – China is a perfect example.
But government promises of a growth plan, as outlined by Deputy President Thabo Mbeki earlier this year, have yet to be fulfilled. Moss Ngoasheng, Mbeki’s economic adviser, said the plan was still being worked on and no deadline had yet been set for its presentation. He discounted any link between the fall in the currency and the lack of a growth plan as “very tenuous”.
Government is trying to please all the people all of the time, taking labour’s side one minute, and business’s the next. Says Van Rensburg: “We are seeing glimpses of a strategy, but what we need is an holistic approach to macro-economic policy.”
Economists do not believe the one percentage point rise in interest rates will be enough to restore confidence in the rand. It should have been accompanied by a policy package, including a programme for asset sales and a timetable for lifting exchange controls, says Nico Czypionka, chief economist of Standard Bank. “That would at least give the impression that the government has a plan, and satisfy market expectations. Instead, Manuel is merely following his predecessor’s line. What we need is more imagination.”