THE role of the SA Reserve Bank (SARB) in the rand’s depreciation by reducing the net open forward position (NOFP) may have been unduly exaggerated, it appears from the interim report of the Myburgh Commission of inquiry into the fall of the currency released on Friday.
”…The NOFP should not be considered an element of the one-way bet,” the report says.
The SARB’s reduction of the NOFP from $23-billion in 1998 to $4,8-billion at the end of 2001 was named at the hearings as one of various factors blamed for the rand’s fall.
Standard Bank group economist Dr Iraj Abedian had testified: ”The SARB’s single-minded focus was on eliminating the NOFP… This of course meant a one-sided intervention in the spot market.
”The SARB was in principle selling rands and buying hard currency, thereby adding to the net demand for hard currency and putting downward pressure of the rand.”
Rudolf Gouws and Christo Luus, chief economists of Rand Merchant Bank and the Absa group respectively, had also submitted graphs as evidence to show the correlation between the reduction of the NOFP and the rand’s decline.
In a statement issued on October 14, 2001 the SARB admitted that
its purchase of foreign currency in the domestic foreign exchange
market might have contributed to the fall of the rand since
September 1998.
It announced that in future it would not intervene by purchasing forex from the market for purposes of reducing the NOFP, but rather use cash flows derived from the proceeds of government’s off-shore borrowings and privatisation.
However, the Myburgh commission report says: ”Had investors and analysts read the statement of 14 October 2001 with the necessary care, they would have realised that as the Reserve Bank would no longer ‘mop up’ US dollars in the forex market to reduce the NOFP, the NOFP should not be considered an element of the one-way bet.
”The evidence before the commission leaves one with the impression that the statement was either not read properly or ignored.”
President Thabo Mbeki appointed the commission, headed by advocate John Myburgh, on January 8.
This followed claims by SA Chamber of Business chief executive Kevin Wakeford that institutions and individuals had enriched themselves at the currency’s expense.
The currency traded at around R7,60 to the US dollar at the beginning of 2001 and hit an all-time low of R13,84 to the dollar on December 21. On Friday it traded at around R10.24 to the dollar.
The commission was tasked to inquire into transactions which contributed to or caused the rapid depreciation of the rand during 2001, and whether those deals were illegal or unethical; whether any of the transactions involved collusion and resulted in improper gain or avoided loss; and exchange controls.
It has to make recommendations to the President on the effectiveness of exchange controls and other regulatory measures and guarding against the occurrence of such transactions; and possible action against anyone who participated in such transactions.
The interim report states that it does not make any findings or recommendations.
”It would be premature and improper to do so before all the evidence has been heard and evaluated.”
The commission says it will hear more evidence during May and hopes to hand over the final report by June 30.
Another factor mentioned in connection with the Reserve Bank was its decision, also on October 14, to strictly enforce the existing exchange control rules and regulations, as it had appeared that speculative transactions, particularly by non-residents, were adding to volatility and rand weakness.
A number of economists testified that this had a negative effect on the rand, as it scared off speculators and reduced market liquidity.
However, exchange control liberalisation, which led to significant capital outflows, was also an important structural factor, SARB governor Tito Mboweni testified.
Gouws said forex market participants formed the view that in the absence of support for the rand by the Reserve Bank, the rand would continue to depreciate.
”The policy of non-intervention became an element of the ‘one-way bet’ view of the rand…” he said, according to the report.
Gouws said a fundamental reason for the long-term decline of the rand was that South Africa’s inflation rate was higher than that of its trading partners.
The deterioration in the global economy and the events of September 11, 2001, also had a negative effect on the South African economy and the rand in two material respects — the flow of capital to emerging markets reduced and after September 11 international fund managers moved from what they regarded as vulnerable economies to safe havens, the report says.
Mboweni cited a significant outflow in capital in foreign direct investment, portfolio capital and other foreign investment in the fourth quarter of 2001.
He said the fact that exporters were lagging the repatriation of foreign currency, in anticipation of a more favourable currency, could have the same impact on the rand as pure speculative activity.
A number of witnesses testified that there was a negative perception about South Africa and its currency in the latter half of 2001. Among the factors mentioned were the Zimbabwean situation, unemployment, HIV/Aids and crime. – Sapa