A DEFICIT in South Africa’s broad balance of payments (BBOP) over the past few years was the underlying cause of the rand’s sharp depreciation in 2001, the Johannesburg-based commission investigating the currency’s decline heard on Wednesday.
Global head of economic research at Goldman Sachs, Jim O’Neill, told the commission that if South Africa wanted a strong rand it would need a BBOP ? current account plus net foreign direct investment and net portfolio flows ? surplus.
”A persistent BBOP deficit was associated with the rand’s weakness,” O’Neill said.
”A BBOP surplus requires more capital inflow and probably more foreign direct investment. This will help the authorities to defend the currency against outflows caused by negative sentiment.”
He said the Mexican peso and the Chinese yuan had appreciated against the US dollar over the past few, mainly because they had balance of payments surpluses from attracting large inflows of foreign direct investment.
O’Neill welcomed South Africa’s commitment to inflation targeting, but said all other policies had to be based around this.
”I think inflation targeting is the most important thing for monetary policy, much more important than the rand.”
He said there should either be no exchange controls or complete exchange controls. South Africa currently has partial exchange controls and this created confusion in the markets.
O’Neil said the foreign exchange market had been especially peculiar since 1999, with the US dollar being ”peculiarly strong”.
He said compared to other currencies the rand had not been independently weak until last year.
The commission, headed by Advocate John Myburgh, was established by President Thabo Mbeki in January this year after he received information that dubious transactions could have caused the rand’s 37% decline last year. – Sapa