The rand has remained near the R8 per dollar level despite the start of the American invasion of Iraq on March 20 and a change in South African Reserve Bank (SARB) exchange rate policy announced on the same day.
On March 20, the Monetary Policy Committee (MPC) said in its statement “the Reserve Bank has on occasions taken the opportunity to purchase dollars for our reserves on a moderate scale. These operations have helped to reduce the Bank’s net open position in foreign currency from $1,8-billion at the end of November 2002 to $1,3-billion on 13 March 2003.
“Such operations purely represent normal prudent management of the Reserve Bank’s balance sheet as is ordinarily the case in central banking. They are in no way directed at seeking to influence a particular level of the rand, whose value will continue to be set by the market.”
This was a change in policy compared with the SARB statement of October 14 2001,
which said: “In future, the Reserve Bank will not intervene by purchasing foreign
exchange from the market for purposes of reducing the NOFP. The NOFP will be expunged from cash flows derived from the proceeds of Government’s offshore borrowings and privatisation.”
The stability of the rand has confounded most economists as the rand has not
previously been seen as a safe haven for risk averse foreign investors. Its behaviour
since the start of the Iraqi war has shown that this is exactly what the rand has
become, as it moved from a worst level of 8,1915 rand per dollar to a best level of
7,9880 today.
Capital flows and commodity prices, not SARB exchange rate policy, were the most
important factors determining the strength of the rand, economists said in answer to a special question in the March 2003 survey by London-based Consensus Economics.
In the March special question, the economists were asked to rank the current
importance of a range of different factors in determining exchange rate movements.
Scores were assigned to each factor on a scale of zero (no influence) to ten (very
strong). Given that a wide range of factors influences different currencies, Consensus Economics asked economists to rank the traditional six factors and then other factors that they thought of particular importance.
The six traditional factors are relative economic growth, inflation differentials,
trade/current account, short-term interest rate differentials, long-term interest rate differentials, and equity flows.
In general it would seem that short-term interest rate differentials are currently a
major determinant of exchange rates as 17 out of 28 currencies show that this factor has the most influence amongst the traditional six factors.
The second most important factor is the trade/current account where for ten out of
28 currencies this is the most important of the traditional six factors. Special factors however overwhelm the traditional factors with only nine currencies where the traditional factors have more weight than the special factors.
In the case of the rand, the most important factors are capital flows and commodity
prices at eight each. The highest rated traditional factor is short-term interest rate
differentials at 6,4 and then inflation differentials at 5,8 and the trade/current
account at 4,2. Equity flows, relative growth and long-term interest rate differentials
were all rated at 3,6.
The recovery in precious metal prices since March 21 has therefore also helped the
rand, while the market expects the SARB to only cut interest rates in June. This will
preserve the rand’s attraction as a high yield currency until then.
A key uncertainty beyond next month is the impact of the countervailing forces of
the foreign exchange amnesty and the “blocked” rand exit. These policy measures were announced in the February 26 Budget and will be implemented from May 1, but nobody is certain of what the impact will be on the rand. Given this uncertainty, the SARB will be in charge of regulating the inflows and outflows so that it does not disrupt the foreign exchange market.
If there is as a mass of funds being repatriated, then the SARB can sterilise the
inflows by adding to its reserves, while if there is a mass of blocked rands looking for an exit, then the SARB will ensure that this takes place over a span of time, so that exporter receipts match the blocked rand outflows.
The forward interest rate market is pricing in a 100 basis points easing for the
June 11/12 MPC meeting, a 170 basis points easing by the September 17/18 MPC meeting and 240 basis points by the November 26/27 MPC meeting.
At its March meeting — the first for 2003 — the SARB MPC left the repo rate
unchanged at 13,5%.
In 1999, South Africa cut its prime rate eight times, from 23% in January to 15,5% in October. Mboweni at the time was responsible for the day-to-day running of the SARB, while he only officially took over as governor in August 1999.
The Growth and Development Summit scheduled for May 11 to 13 aims to provide the South African economy will address some the macro-economic policy issues. There are whispers that the Summit may be delayed until there is more clarity on the amnesty impact on the rand. – I-Net Bridge