Analysts say the commission of inquiry could be useful if it explores existing regulations affecting the currency Mungo Soggot The government is expected to complete terms of reference for its rand probe by mid next week, signalling whether the investigation will just be a tightly focused forensic probe or include a broader inquiry into the rand’s collapse.
While the commission originates from a tip-off by the South African Chamber of Business’s Kevin Wakeford, the wording of the terms of reference could allow John Myburgh, appointed to chair the probe this week, to conduct a more wide-ranging exploration of the currency’s precipitous decline. Analysts have generally been dismissive of the commission and, in particular, of the merits of investigating specific culprits. Some have nevertheless welcomed the opportunity for a broader inquiry into the circumstances surrounding the rand’s collapse and the efficacy of existing regulations affecting the currency. Economists have generally suggested that the government has been sidetracked by Wakeford’s allegations instead of focusing on the root cause of the exodus of money from South Africa, which largely boils down to a lack of confidence.
Wakeford initially called for the inquiry at the end of December, elaborating on the idea early in the new year. He said certain institutions had used “dubious financial methods” to manipulate the currency. There has been speculation that he is referring to a South African company that had secured permission to fund a foreign acquisition offshore, but had subsequently sourced much of its funding locally. The suggestion is that other players got to know of this, and were then in a position to cash in on an imminent exodus from South Africa of rands. Since the rand went into freefall last year economists and politicians have scrambled for explanations. Frenzied talk of foreign speculators has come despite the fact that the Reserve Bank controversially clamped down on speculation in the rand by stipulating that all trades in the rand had to be backed by underlying transactions. One less vocal school of thought is that the main culprits are South African companies listed abroad and foreign companies with local operations, all of which have sucked increasing amounts of cash offshore. Myburgh said this week that he hoped to have the inquiry set up within days of receiving the terms of reference, the main initial task being to select a team of investigators and advisers. “I hope this will take days, not weeks,” Myburgh said, adding that he would act on the advice of the Department of Finance and the banking industry. It is understood that other panellists could also sit on the commission. Myburgh said the legislation under which the commission was appointed allows it to be held in public, but that he could allow evidence to be heard in camera if he decided such a request was warranted. SG Securities chief economist Nico Czypionka says the appointment of the investigation reflects the belief held by the government that speculators must have been involved and that the currency collapse should not have happened. He says he would be “very surprised” if the investigation found any conspiracy to take the rand down, as opposed to the more likely scenario that players had sought, in a legitimate ways, to take advantage of the rand’s decline. Czypionka says it is highly unlikely that any corporations would have acted illegally. “Corporations do not act illegitimately it is far too dangerous.” But, he says, the commission could be useful if it explores the appropriateness of regulations and policies affecting the markets. The commission is one part of a well-received package of measures designed to bolster the currency, after which the rand indeed strengthened. The package also included a statement underscoring the country’s fiscal health and a commitment to reduce and eliminate its net open forward position its foreign exchange liabilities that are not covered by the Reserve Bank’s net foreign exchange reserves. The central bank has been steadily winding down its forward position, which has been cited as one of the main reasons for the currency’s weakness. The government also announced a deal that will bag the state $479-million for its stake in cellular holding company M-Cell. Czypionka says the deal is an “ingenious disguised foreign exchange loan”, as opposed to a sale. Effectively the government gets $479-millon, but does not sell the asset and can cash in on a better price when it is sold after the market has recovered.
Economists assume the money will be used to decrease the government’s net open forward position. In an interview with the Financial Mail, Director General of the National Treasury Maria Ramos cited four other reasons for the currency’s decline, in addition to the net open forward position. These included negative sentiment towards South Africa, contagion from Argentina and Zimbabwe, and dividend outflows from South Africa. Ramos said that in addition to outflows from South African companies listed in London, just less than 40% of the Johannesburg Securities Exchange is now foreign-owned, providing another source of dividend outflows. Econometrix economist Tony Twine says of the commission that “economics seldom lends itself to forensic investigations, but economists have long suspected that the movement of the rand has been driven by something other than their subject”.