Madeleine Wackernagel : Taking stock
Fresh from its $16-billion rescue mission in Thailand, the International Monetary Fund (IMF) is liberally dishing out advice to other countries to prevent similar debacles elsewhere. Currency crises have a tendency to be contagious. But in the case of South Africa, it is being over-zealous.
Take the forward dollar market. The Reserve Bank’s dominant role is an anachronism, a legacy of the country’s isolation, and the IMF rightly urges the bank’s withdrawal. Indeed, the bank is committed to just such a move. But in its characteristically cautious way, it is doing so gradually.
The IMF suggests it get a move on, even if interest rates have to be increased to defend the inevitable collapse in the currency. Raise interest rates? Surely we want to do just the opposite at this stage in the economic cycle. Besides, the bank’s role in forward dollar sales is not a new development, and the market has, so far, not been overly concerned about the risks on the unhedged book. But the collapse of the Thai baht – and that government’s use of forward dollar sales in a bid to shore up the currency – has revived interest in the issue in this country and prompted speculation that the financial system is on shaky ground.
South Africa is no Asian Tiger, a comparison that has been made rather ruefully in the past when considering growth rates. But neither are we running a current account deficit at 8% of gross domestic product as was Thailand. South Africa’s is less than 1%. And while some economists have long been decrying the tigers’ economic miracle as a myth, it was only a matter of time before somebody noticed that behind the phenomenal growth the fundamentals were seriously out of kilter.
Thailand was the first to fall to the speculators but the sport didn’t end there. Malaysia, the Philippines and Indonesia were next in line. For no good economic reason, the shock waves have even reached as far as Hong Kong, demonstrating the power of speculators’ pressure – and perceptions.
For years, the tigers could do no wrong but now the fragility of their particular economic systems has become painfully obvious. As has the power of the markets to undo them.
Sentiment is easily swayed, as was amply demonstrated last February when the rand went into free fall. On that occasion, the Reserve Bank did the only sensible thing and kept out of the market, whereas in both the Mexican and Thai crises, the authorities wasted valuable reserves on fighting a lost cause. Where the bank did err was to make public its decision not to support the rand, which only served to fuel the speculators’ fire and prolong the crisis.
Eighteen months down the line the situation is very different. Liquidity has improved, thanks to offshore funding such as the Samurai and Yankee bond issues, and speculative capital flows are not as volatile. And while criticism of the structure of the local forward dollar market is valid, and the dearth of reserves a concern, no amount of foreign exchange reserves helped Thailand to beat off the currency predators. Except for the comparatively high foreign ownership of bonds, the local market is far less vulnerable to attack.
In contrast to Thailand, South Africa’s current-account situation has improved dramatically and is heading into surplus. While growth forecasts have been scaled down, inflation is finally heading firmly into single-digit territory. And government finances too are under control. Of real concern, however, is the efficacy of the implementation of public policy. If investor perceptions change on that score, the ramifications could be serious.
So far, the market has been unmoved by apparent cracks in the government’s commitment to its growth, employment and redistribution strategy. But as Thailand found out to its cost, markets tend to be fickle. We cannot afford to be smug, despite the strong fundamentals, but nor should we succumb to idle speculation.