On Wednesday miners and their bosses marched to demand lower interest rates. On Thursday the Reserve Bank lowered rates.
Also drawing attention to the currency were last week’s comments by Bobby Godsell, CEO of AngloGold Ashanti. Describing the debate about the rand as ”feeble and flimsy”, he asked three questions in a bid to shift the focus. The Mail & Guardian asked four pundits to respond to Godsell’s posers.
What gold and foreign exchange reserves should South Africa have? (At end-July, net gold and foreign exchange reserves stood at $8,4-billion. Other developing nations, such as Korea and Mexico, average about $40-billion.)
Gwede Mantashe (National Union of Mineworkers general secretary): Reserves in South Africa should reach at least $20-billion. The Reserve Bank has the opportunity now to buy dollars more aggressively and double its foreign reserves. It could then use these as a monetary instrument to stabilise the exchange rate.
Iraj Abedian (head of Pan-African Advisory Services): About $10-billion to $12-billion. In theory, because South Africa has a free-floating exchange rate system, we don’t need foreign exchange reserves [because the exchange rate mechanism clears the foreign exchange market on a daily basis]. In practice, however, you need foreign exchange reserves because the market perceives it as an important indicator of macro-economic stability. Also, there are occasions when the market fails, which creates a gap for speculators. The Reserve Bank needs to have deep enough pockets to stop currency manipulation.
Neva Makgetla (economist, Con-gress of South African Trade Unions): The standard answer is three months, but obviously if you have higher reserves it makes it easier to hold down the currency. In principle this is the perfect time to build up reserves, but in practice we would like to know a bit more about the opportunity costs. How would the Reserve Bank finance this, and what would not be financed as a result?
Lumkile Mondi (chief economist and head of research, Industrial Development Corporation): We need reserves of about $25-billion to wield influence against speculators. We are slowly accumulating this, but the Reserve Bank has to be tactical because if it aggressively shows its hand, speculators will take advantage.
What real interest rate differential should South Africa aim at, relative to its major trading partners? (South Africa’s real interest rate differential is 7%.)
GM: The real interest rate differential needs to drop to between 2% and 3%. A high differential is great for money markets, but could lead to the death of industries.
IA: Not more that 2% to 2,5%. Our real interest rate differential rate is too high, which is attracting too much portfolio capital from short-term investors because they can’t get a 7% real return anywhere else. In the United States it’s negative and in Europe it’s nearly negative. The danger to South Africa lies not in excessively high borrowing costs, but in the attraction these rates have for overseas investors. This artificially strengthens the currency but does not translate into real investment, which means domestic production will drop — mines go out of business, new projects are put on ice. The Reserve Bank should do more by aligning real interest rates with its trading partners — currently it’s out of line by as much as 200 basis points.
NM: Between 2% and 3% — certainly lower than now. We have the fourth or fifth highest real interest rate differential in the world. That contributes to the very artificial high rate of the rand on the one hand, and on the other it doesn’t translate into real investment because the economy slows. The Reserve Bank is sticking to the 7% level because it believes its sole aim in life is to do something about inflation.
LM: Between 3% and 3,5%. At the moment it’s too high, meaning we are not attracting long-term money. South Africa is perceived as a high-cost country because of communications and transport monopolies. We must do more to attract foreign investors.
Where is South Africa headed in the longer term on capital controls?
GM: Exchange controls are an unnecessary headache that only serve to deepen market stereotypes. Removal or relaxation of controls will have a positive impact on our economy. Our immediate concern is for the Reserve Bank to bring the rand to R7,50 to the dollar, which would push the gold price to R95 000 a kilogramme from the current R70 000.
IA: Only one way — towards more relaxation. This will allow money to leave South Africa, which will weaken the rand, at least in the shorter term.
NM: South Africa has a problem of hot money and getting rid of exchange controls could mean losing local investment surpluses, which might not be compensated by real direct investment. This could have the unintended effect of further strengthening the rand. We need to look at ”speed-bumps” — controls that will slow down the short-term capital inflows without discouraging long-term inflows. The government is so afraid of taking strong action that it is overlooking the costs of the status quo. Its job is to manage the process and not just leave it to market forces.
LM: We have to keep capital controls until we have sufficient reserves. With these in place we can start staggering the controls downwards. More immediately, however, the Reserve Bank needs to play a more active role in managing the economy rather then sitting aside, which has led to the surging rand.
Tito’s reversal on rates
Reserve Bank Governor Tito Mboweni (right) resumed his second term by surprising the markets with a rate cut of 0,5%, writes Thebe Mabanga. This moves the repo rate to 7,5 % and prime to 11%. Mbo-weni prefaced his address by noting ”it is always wise that when the facts change, one changes one’s mind”.
A Johannesburg-based trader said the announcement had caused ”chaos” in the market. The Top 40 index gained 3%.
The biggest change that has occurred since the beginning of the year has been the inflation outlook. The Reserve Bank now expects CPIX — inflation minus mortgage rates — to stay within its target band of 3% to 6% for the next two years.
Mboweni cited global political instability, oil prices and exchange rate movements as the greatest threat to the inflation target.
Industrial Development Corporation economist Lumkile Mondi said he was surprised but encouraged by the Reserve Bank’s assertion of independence. ”They haven’t heeded pressure from analysts trying to tell them how to do their job. However, the cut means little for the economy because we still have very high reserve interest rates compared to our peers.”