analysis
Nigel Bruce
Whatever “good news” might have been announced under the three-year budget plan, it is certainly not being reflected in that most sensitive of economic barometers, the value of the currency. Nor does it seem to have occurred to those who echo this sentiment that there are reasons for the rand continuing to head south and that they need careful examination.
It is all very well for a finance minister to attempt to make a silk purse out of a sow’s ear. But the line should be drawn at misrepresentation and what is transparently political spin. A sustained reduction in the rand’s value cannot be good for the economy. All it does by boosting export earnings temporarily is to buy time for a corrective change in policy.
If, however, that opportunity is not taken, the economy will move further into the mire. What happens when the currency goes into free fall is that the capacity of the economy’s productive assets is reduced. Increasingly it costs more to produce less as importers of capital assets and their customers struggle to survive. And those assets represent plant and machinery, not luxury consumer goods.
Allow that process to go too far and you will have economic disaster, with enterprises pushed to the wall, unemployment rising, tax revenues falling and mayhem similar to the outrages in Zimbabwe. If local investors know this and are shy about investing, their apprehension is magnified many times in the global markets.
So, contrary to what Reserve Bank Governor Tito Mboweni said recently, the value of the currency does matter and he lets it sink at our peril and, of course, his own. For his bank is tasked “to protect the value of the currency in the interests of balanced and sustainable growth”.
The rand fell by 20% last year and by a similar amount in the first six months of this year. Over the past five years it has lost more than 50% of its value. Some price stability! The impact of that on domestic inflation is going to be sharply negative. And if there is to be more austerity to counter its impact the interests of the unemployed and the poor, which demand amelioration, will be further prejudiced.
To argue that the global market is not responding to the modest macro-economic gains made so far because of negative sentiment is to grasp at a half-truth. The danger therein is that myopia is substituted for analysis of the political economy and the factors that weigh on it.
Of course, pressure on the currency is coming also from areas beyond the direct control of the central bank. But by threatening banks who have taken positions against the rand (what does Mboweni expect the banks to do in the circumstances?) and those who are cavalier about exchange control he is aggravating adverse market sentiment by tilting at windmills.
If his tactic is to expose speculators to market sentiment and thereby discourage them, he should be dismantling all impediments to the market’s valuation of the currency. That means exchange controls should be progressively but vigorously dismantled, and that intention should be made clear.
This is, after all, declared government policy which, had it been applied, would have reduced the need for some of our large companies to relocate abroad where access to capital is easier and taxes lighter. Their departure will see less demand for the rand in future.
There are other tactics that need to be considered. A linkage to the dollar or the formation of a currency board are among them. But a return to a dual exchange rate is not. For that would provide a platform and a mechanism for further speculation.
Above all, what is required to keep speculators at bay is for those who implement monetary and fiscal policy to demonstrate that they know what they are about. It was unfortunate that Mboweni on his appointment said that he would not criticise the policies of other ministers. To fulfil his responsibility he needs to do so. And the more he shirks this, the more he will create an adverse bias in the markets.
But negative sentiment does play a part and, by association, the collapsing Zimbabwean economy is the most telling factor. That is why official condemnation is so necessary to convince potential rand investors that similar outrages will not happen here. It does not matter that Robert Mugabe is unlikely to be moved.
What counts is global investor sentiment and that is more important to us than trade with Zimbabwe, which in international terms is small. The drawback for the rand of President Thabo Mbeki’s ambitious plan to rescue Africa, whatever the substance may eventually be, is that it emphasises this unfortunate association.
The challenge now is for the government to demonstrate that it can use its improved financial position to reduce the impact of other serious social drawbacks like crime and deteriorating services and reduce poverty and unemployment without a reversion to past profligacy. It needs to influence expectations in that direction with quiet confidence rather than righteous indignation.
That can be done by persuading the trade unions to curb excesses, encouraging business to invest and improving delivery systems so that government spending achieves its objectives with precision. Reducing the tax load substantially now, getting an income grant into the hands of the poor and not the pockets of public servants, and improving service delivery will have that impact.
There are intimations of this in the three-year plan. But they are timid and imprecise. They do not demonstrate a confident grasp of the need to adjust fiscal and monetary policy to changing circumstances or what the likely outcome will be. While prudence is always necessary, the need for austerity is not a continuous one. It must vary according to changing circumstance. It requires “smart” policy both at the treasury and the central bank that is demonstrably in touch with reality.
Trying to put a constructive spin on the rand’s plunge and claiming markets are vindictively ignoring the improved financial position of the fiscus is transparently out of touch with reality. It is achieving the opposite of what is intended by patronising investors rather than confronting reality.
Nigel Bruce is a DA MP