Contrary to popular opinion, speculators did not spell doom for the rand, reports Donna Block
The United States Secretary of the Treasury, Robert Rubin, is due to visit South Africa in about 10 days time, and when he gets here he is not likely to be very sympathetic to the bleatings of the South African Reserve Bank and its governor, Chris Stals, that they are the hapless victims of foreign speculators.
Rubin, a former currency trader himself, is well known for having little time for emerging-market countries blaming their woes on outsiders. To the shock of his business- student audience in Bangkok this week, he said speculators were not to blame for the Asian crisis: “The role of speculators will be found to have been relatively small and transient.”
His view echoes the findings of a recent report by the International Monetary Fund (IMF) which says speculators indeed made large bets that Thailand’s currency, the baht, would be devalued in 1997, but so did many other investors. Leading the herd were not the hedge funds that are so popularly blamed for the world’s currency calamities, but major international banks.
It also found that Thai companies and banks got in on the action. Ultimately, the fall of the baht and other Asian monies was owing to the failure of Asian governments to police their own banks and establish the kind of policies which discourage, rather than encourage, speculators.
Stals and his team of number-crunchers, however, have apparently failed to take on board either the findings of the IMF report or the lessons of the Asian debacle that are still rocking world economies. Instead of looking at problems closer to home, the Reserve Bank governor continues to point the finger of blame at faceless speculators and nameless hedge funds.
The shifting of responsibility cuts little mustard with most economists, who believe the Reserve Bank bears more than the lion’s share for the rand’s misfortunes. They argue it is the bank’s flip-flopping policies which provided the speculators with an open window to savage the rand virtually at will.
Speculating against currencies is an accepted form of financial activity – the international banking equivalent of horse- racing. It is a particular speciality of the hedge funds.
A hedge fund is simply a managed pool of cash whose sole reason for existence is to take advantage of swings in the values of equities, commodities or currencies by betting whether they will go up or down. The funds operate by exploiting gluts and shortages as well as inefficiencies or weakness in policies that underlie a currency or economy.
The best-known speculator in the world is George Soros, a Hungarian-born financier- cum-philanthropist who was credited with the currency crisis in Britain in 1992 and the Asian currency crisis in 1997.
Soros’s Caribbean-based Quantum Fund and Revco Fund have been specifically named by traders as having taken positions against the rand since the current crisis hit in May. But his funds are not the only ones active here and may not be the biggest players. Several others, mainly banks such as JP Morgan out of New York and Baer Julius Bank out of Switzerland, have also got into the short-the-rand game.
Even South African banks have given a hand, at least by facilitating the international deals through lending the speculators the money they need to make a run on the currency. All the players have declined to confirm or deny their roles, saying they never comment on trading activity.
But blaming these banks and funds for doing what they do is the equivalent of blaming a leopard for eating sheep. One South African economist in London went as far as saying: “Stals’s search for a scapegoat is totally naive.”
The Americans in particular are upset with South Africa. While Deputy President Thabo Mbeki is rallying around Stals and his team, halfway across the world officials in the US are privately accusing the South African Reserve Bank of “monetary malpractice”.
The Americans blame Stals and company of creating a confused policy responsible for sending mixed signals to the market by first raising interest rates, then lowering them and then raising them again in a matter of days.
To be fair, economists say Stals is in an unenviable position, faced with two equally unpleasant choices. He has to choose between an astronomical interest rate which is likely to drag South Africa into a recession, or a swelling inflation rate as the rand falls further. The trouble is he appears to be unable to decide which is better or worse.
Last Thursday, when the Reserve Bank “prematurely” moved the repo rate to 18,7% from Monday’s blistering 23,9%, it indicated there was indecisiveness in its interest-rate policy.
In an interview with Dow Jones last weekend, Stals went so far as to admit that the setting of the repo rate “needs some trial and error to get the right level”.
“I really thought the Reserve Bank had come a long way,” says one New York-based analyst. “They should have stuck to their guns on the interest rates. They’ve lost credibility because of this, they’ve become more amateurish.”
Trial and error, like indecisiveness, fuels speculation. But nothing feeds the beast like desperation. And last Friday witnessed perhaps the most desperate move to date, when there was an apparently blatant attempt to make it seem that the US government jumped into the rand fray.
Rumours which started in Johannesburg claimed the Federal Reserve, the closest thing the US has to a central bank, had tried to come to the rescue of the rand. But, contrary to reports, the Fed did not “intervene” – that is, use the US’s own money to help prop up the rand.
The Fed would only ever make such an extraordinary move in extreme circumstances, and only when it is in the direct interests of the US economy to do so. A rare example happened last month when the Fed came to the rescue of the Japanese yen.
What the Fed did do was, at the request of the Reserve Bank, sell South African dollars from South Africa’s account at the bank, which is normal business.
The Americans in particular were not amused by the rumours, and some officials suspect it was the South African Reserve Bank itself which planted them in an attempt to scare speculators into thinking they were facing the power of the world’s mightiest bank. But the move backfired, and when the speculators sensed deception as well as desperation they attacked the rand with a vengeance.
Asked to comment on the supposed intervention by the Fed, Rubin’s number two, US Treasury Deputy Secretary Lawrence Summers, brushed aside the question and instead diplomatically hit out at the Reserve Bank.
“What is most important in South Africa now,” he said, “are strong measures to address what are important challenges they face in both the macro-economic and structural areas.”
In other words, get your house in order.