Max Gebhardt
AS the rand continued plummeting this week, Minister of Finance Trevor Manuel said the proper response to the currency’s woes lay in the steady implementation of the government’s macro-economic strategy.
The market didn’t agree with him, with many traders blaming the rand’s spiral on a lack of a coherent policy.
The rand notched up record lows on Monday, Tuesday and Wednesday – hitting R4,7435 to the dollar on Wednesday afternoon. Its performance against sterling was equally dire.
At the time of going to press the currency had slipped to a personal worst of R4,7540 against the dollar.
The fall was initially pinned on comments at the weekend by Manuel and Reserve Bank Governor Chris Stals that the rand had not yet reached a point where Stals had to deviate from his intention to base policy decisions on underlying economic fundementals. This was interpreted to mean Stals was reluctant to lift the interest rate – a decision at odds with market expectations.
Further contributing factors in this week’s downfall of the currency, according to economists, is the weak current account, small capital inflows, the continued negative foreign perception of the maintenance of exchange controls and low foreign reserves.
The country’s foreign reserves fell to R10,04-billion in September – equivalent to four weeks’ import cover – from R10,07- billion in August.
Darkening the gloom, Board of Executors (BOE) economic consultant Rob Lee says in his latest Investment Outlook that the central government Budget deficit for 1995/96 will be 7,1% rather than the government’s 5,8% target. His projections for 1996/97 are 7,6%.
”The crux of the problem is that the most widely known or ‘headline’ measurements of the size of public sector borrowing exclude important components of state spending.” BOE’s Outlook says one of the main ”missing” elements are the losses on the forward cover book of the Reserve Bank. The system is often used as a mechanism to protect the rand in periods of downward pressure on the currency, when ”cheap” forward cover is provided to importers by the bank.
Lee says there were net forex losses by the bank of R1,9-billion in 1994/95 and R3,1- billion in 1995/96. He is estimating losses at R5-billion for 1996/97.
Lee is recommending that the Reserve Bank withdraws completely from the forward cover market. However, he warned that such withdrawal would not be practical without an effective abolition of exchange controls.
”The following disturbing implications are suggested by this analysis: South Africa is probably in the ‘debt trap’, real interest rates will remain very high, single-digit inflation is not sustainable and the prospects for attracting foreign capital are poor,” the report said.