South African Reserve Bank (SARB) Governor Tito Mboweni on Tuesday said the rand’s volatility observed over the past few months is “clearly not healthy for the economy”.
Addressing the Cape Times Breakfast Club in Cape Town, he said “although there are disagreements as to the appropriate level of the exchange rate, there is general consensus that the more important issue is the volatility of the exchange rate,” Mboweni said.
On Tuesday, the rand moved in a range of R7,76 per dollar to 8,07 in part because of Mboweni’s comments that the rand was still undervalued.
“The uncertainty caused by such movements makes investment and export planning extremely difficult. What may seem a profitable venture under one exchange rate scenario, may turn out to be totally unviable should the exchange rate change substantially. Unless the exchange rate is driven by the underlying fundamentals, trying to predict exchange rate movements can be extremely
hazardous and adds to the riskiness of investment.”
“Although the expunging of the NOFP was expected to eliminate an important
source of volatility in the exchange rate, volatility is however a fact of life for most emerging market economies.”
“In a recent Bank for International Settlements study comparing the experience of 12 emerging market inflation targeters with that of six of their industrial country counterparts, it was found that emerging market economies tend to be relatively more exposed to exchange rate fluctuations for a range of structural and historical reasons.
The study concludes, however, that ‘in the longer run,…… improved inflation outcomes, consolidation of policy credibility and economic development can be expected to help reduce some of the vulnerabilities of emerging market economies’.
“In addition, the study argues that although exchange rate considerations pose a challenge to emerging market inflation targeters, the cost of exchange rate movements are not only of concern to emerging markets.
“Current experience in Europe and the United States reminds us that having to keep an eye on the exchange rate is also a fact of life in industrial economies, inflation-targeting or not.
“With low or at best moderate growth forecasted in the United States, the euro area and Japan, exports cannot be counted on to continue to lead South African economic growth in the near term.
“South African exporters will have to focus on improving competitiveness through productivity enhancements. They cannot just rely on the exchange rate. The mining industry and other exporters are crucially important to the South African economy, but so are the many industries that source inputs from abroad.
The current slowdown observed in the manufacturing sector is not simply a question of a strong exchange rate, but also the weak state of global demand. The 78.6% annualised appreciation of the South African rand relative to the US dollar in the first quarter 2003 compared with the fourth quarter 2002 is threatening to undermine the record length of the South African economic upswing.
The South African economy has officially been in an “upward” phase since September 1999 and in May 2003 exceeded the previous record upward phase, which lasted from September 1961 to April 1965.
Data released on Wednesday, however, show that the export dependent sectors of mining and manufacturing declined in the first quarter 2003 relative to the fourth quarter 2002.
Mining production declined by a seasonally adjusted annualised (saa) 4,2% in the first quarter on the fourth quarter, while manufacturing production slumped by 7.4% on the same basis. The record monthly manufacturing production on a non-seasonally adjusted basis was achieved in November 2002 and since then production has plummeted by 10,2% to March 2003. – I-Net Bridge