ANTHONY STOPPARD, Johannesburg | Wednesday
DESPITE a steep drop in the value of the South African rand, the government is likely to resist pressure for it to step in and try to protect the currency.
The rand dropped from under R10 to a new low of R11,28 to the United States dollar, since the beginning of December 2001 – for no clear reason and despite it being generally accepted that South Africa has among the best economic fundamentals of any of the emerging markets.
By Tuesday the currency was trading at around R11,15 to the dollar.
The rand has lost around 30% of its value against the dollar this year, arguably making it the world’s worse performing currency on international markets.
Political instability in neighbouring Zimbabwe; general pessimism about the political and economic future of Africa; the economic crises in other emerging markets, like Argentina; and the slow pace of South Africa’s privatisation process are often given as reasons for the lack of support in international markets for the country’s currency.
South Africa also has one of the most open markets in the world and money can flow in and out, relatively easily.
The radical fall in the value of the currency has led to calls from economists and political parties for the government to take some kind of action.
Economist, Mike Schussler, of the online trading company, Tradek, has called on the South African Reserve Bank (SARB) to approach the International Monetary Fund (IMF) for a loan to help it close down its Net Open Forward Position (NOFP). The NOFP is basically dollar loans that the SARB has to cover, but for which it does not have the reserves.
This means the bank is forced to buy dollars and currency speculators can demand more rands for the international currency. This leads to the rand losing value.
A loan from the IMF would allow the SARB to pay-off these outstanding commitments in one swoop, and stop it from having to keep buying dollars.
Schussler is a highly regarded economist who is known to have with great faith in South Africa. But, other economists feel that for the country to take any new dollar loans at a time when the currency is volatile is not a good idea.
In any event, the South African government has shown a great aversion to taking money from any of the international financing institutions, and credits a lot of its ability to maintain its own economic and social policies to keeping the IMF and the World Bank at arms length.
The South African Foundation – an association of large local and foreign companies – says the sharp decline in the value of the rand was not a sign of political or economic failure, but the result of a speculative attacks by currency traders.
The foundation adds that decline of the currency was ”facilitated by the country’s sophisticated and liquid capital market. The rand is currently the most traded emerging market currency while South Africa is not the largest emerging economy.”
The Foundation applauded the government and the Reserve Bank for having followed the right policies, and encouraged them to ”stay the course.”
Reserve Bank Governor, Tito Mboweni, has made it clear that he does not have the money to try and prop-up the currency and as long as domestic inflation is under control, he is not going to try and save the rand.
A benefit of the drop in the value of the currency has been an export boom for South Africa, as its goods become cheaper of the international market.
The cheaper currency is also expected to boost the tourism industry as low local prices attract visitors.
However, a slow-down in the international economy has seen the market for South African products and commodities, shrink slightly in recent months.
There are also fears that the increased price of essential imported good could drive up inflation in South Africa.
In the meantime, public hearings are being planned for the South Africa Parliament next month, to hear if anything can be done to stabilise the currency. Chairperson of Parliament’s finance portfolio committee, Barbara Hogan, says the Reserve Bank, the National Treasury and economists will be invited to give their views on the rand, and on what could be done to halt its dramatic slide.
The finance portfolio committee has also recommended that the Cabinet to regularly review options for cancelling part of the roughly US$4 billion arms that the government has committed itself to buying. The committee has expressed concern about the effect of the deteriorating exchange rate on the controversial deal, which was signed when the rand was at R6,25 to the dollar. – IPS