With market sentiment on its side, now would be a good time for South Africa to act on exchange controls, a USeconomist tells Madeleine Wackernagel
THE subject on everybody’s lips at this year’s Socit Gnrale Frankel Pollack investment conference was exchange controls. But the governor of the Reserve Bank wasn’t talking, and neither was the finance minister, except to reiterate their commitment to a gradual relaxation.
Not that anybody, realistically, expected a sudden capitulation to market pressure for a “big bang”. David Hale, one of several overseas speakers, even went so far as to concede that while foreign investors may desire it, they weren’t insistent on it.
“The markets can live without a big bang as long as some targets are set, soon. And we must see some progress soon.
“Sentiment towards South Africa has turned around in the past four months, so now would be a good time to issue policy details, while the markets are still benign.
“Most developing economies have some form of controls but the obvious gap in this country is an opportunity for the corporate sector to invest abroad. There is a great bank of capital here waiting to go somewhere.”
Hale, global economic strategist and senior vice-president of Zurich Kemper Investments, Chicago, and no stranger to these shores, believes the rand stands out as a good currency right now.
“Interest rates in the United States and Europe are very low, which immediately makes the South African market more attractive. That could, of course, change if wage pressures become too great in the US, and the Federal Reserve Board decides to lift rates in a bid to dampen inflationary pressures, but such a move won’t come as a great shock. It will have been discounted.
“I’d rather invest in rand-denominated bonds at this stage than in a higher-yield Russian bond, for example. The rand market is very attractive, and though I’m a speculator by instinct, sky-high yields have a tendency to collapse.”
One cloud hanging over South Africa’s prospects is the gold price and the perceived threat of gold sales by European central banks in anticipation of achieving European monetary union (Emu) in time for January 1 1999.
But even this fear could well prove unfounded, says Hale. “Emu is looking increasingly shaky. I believe there is a 50% chance of the whole thing collapsing, which would give the gold price an immediate boost.
“In times of turmoil, gold is the traditional safe haven. This time will be no different.”
Cracks have certainly begun to appear in the Emu edifice, despite assurances by Germany’s Chancellor Helmut Kohl and President Jacques Chirac of France that the foundations are in place.
“The European Union is suffering from high unemployment because of rigid labour markets, burdensome levels of taxation, and a general lack of micro-economic flexibility, which raise disturbing questions about whether Europe is an optimal currency area. So it is not difficult to construct scenarios whereby Emu is postponed for several years or self- destructs because of rising unemployment in the early part of the next century.
“In either case, bullion could rally sharply as fears of central bank sales recede,” says Hale.
Even if Emu is successful and European central banks do sell down their holdings, gold need not necessarily pay the price. The Asian central banks are potential customers for excess supplies as their holdings of bullion are insignificant compared with their large stocks of foreign currency reserves. An obvious candidate is the People’s Republic of China, with more than $110-billion of forex reserves invested mainly in dollar securities, which it may consider diversifying.
Says Hale: “It is unlikely that with China emerging as a major economic and military rival to the US in Asia it would want to keep its foreign reserves almost entirely in US Treasury securities.”
But as the South African economy becomes less dependent on gold for export earnings, other markets have to be investigated. On this topic Hale is adamant: the trade liberalisation policies embarked upon in the past few years have to be continued and expanded.
“The private and public sectors must work with the unions, much as happened in Australia in the 1980s, when it realised growth was lagging well behind that of the Asian tigers. The labour government of the time embarked on a programme of financial deregulation and tariff abolition while also negotiating a series of wage/price accords with the trade unions to keep the process on track.
“The Australian example is one South Africa should study closely because it demonstrates the importance of trade liberalisation to promote micro-economic reform in a country with a large natural resource endowment.”
In this context, rapid implementation of the government’s growth, employment and redistribution strategy is crucial, he says.
“There are no quick-fix solutions to South Africa’s socio-economic problems,” says Hale. “I’m impressed that the government has managed popular expectations so far, but without short-term tensions, such as Budget cuts, there will be no long-term solutions.”