Manuel was urged last week by a top economist to take “the big bang” with the relaxation of foreign exchange controls when he presents the country’s national Budget on Wednesday February 18.
Addressing the Cape Town Press Club former University of Cape Town commerce faculty dean Professor Brian Kantor, who is now an investment strategist for Investec Securities at Investec Bank, said although he did not expect any surprises in the budget “the least satisfactory feature of our economic environment has been the behaviour of the exchange rate” and this needed to be tackled.
Kantor, while acknowledging progress made already in relaxing exchange controls, suggested two ways of dealing with the problem — going for the big bang or announcing a 10-year plan on how to deal with the exchange rate system.
He said exchange rate weakness — which had recently been reversed — was relatively unimportant compared to exchange rate volatility. “The exchange rate has moved much more than inflation differences (with trading partners) or competitiveness would have justified. It (the currency) has been extremely volatile.”
Arguing that South Africa had been poorly rewarded for the extremely conservative fiscal and monetary stance taken by Manuel and his team since he was appointed in 1996, Kantor said he had spent much time considering why there had been “such panic” that had taken the rand to about R13 to the US dollar in 2001.
The reasons for the panic were considered by the Myburgh commission but it had never got to the bottom of the problem. However, he thought there was a simple explanation. “I think the panic was caused by unintended consequences of partial exchange control reform.”
The asset swop mechanism “in particular” had put dollars on the table “and encouraged people to come and get it”. The rand had been punished. Large fees had been made in the process by financial services interests. “Gradual exchange control reform is a bad idea… it encourages panic at times and leads to instability in the exchange rate.”
Kantor argued that prudential limits on foreign exchange allocations should be set far higher for pension funds in South Africa in particular “but let us get this process over with … it is very destructive”.
He said that South Africa had not been rewarded for extremely sensible and conservative fiscal and monetary policies and was paying “a premium of perhaps R15-billion a year” on debt repayments — although debt as a percentage of GDP had in fact declined.
Kantor suggested that despite the wooing of investment, visits by President Thabo Mbeki to such countries as Haiti had not done confidence much good. “The problem is that (the South African) government hasn’t had the respect it deserves for its policies, for what are enterprise friendly policies that have been sustained.”
These have been most clearly demonstrated in two markets, the market for government stock itself and the currency market. “I find it almost an affront to myself as an optimistic South African,” said Kantor.
Asked about cuts in personal tax, he said it was unlikely to take place nearer the top of the income scales. — I-Net Bridge