South African Reserve Bank Governor (SARB) Tito Mboweni cautioned on Monday that the country’s widening current-account deficit posed a risk to the exchange rate of the rand.
Addressing the First Macroeconomic Policy Challenges for South Africa conference in Pretoria, Mboweni said that in recent months the risks to the inflation outlook had increased.
Factors leading to this deterioration include high growth in consumer spending, rising levels of credit extension to the private sector and developments in the international oil prices.
Although oil prices had moderated recently, upside risks remained, and a challenge the SARB faced was to keep inflation within the inflation target range in the face of significant exogenous shocks as posed by the oil-price movements. Research on the first- and second-round inflationary effects of oil-price increases was therefore important for making good monetary policy decisions, the central bank governor said.
High levels of domestic expenditure had contributed to the widening deficit on the current account of the balance of payments.
“While the deficit is currently more than adequately financed by capital inflows, investor fears relating to the sustainability of the deficit increase the risks of exchange-rate adjustments, which could threaten the longer-term attainment of the inflation target. The policy challenge is to maintain low inflation within the context of a growing economy and a sustainable external balance,” Mboweni added.
There were also challenges facing the country’s financial markets.
“South Africa is a small open economy by international standards,” Mboweni said. “This in itself presents some challenges for the pursuit of domestic price stability. Our foreign exchange market is very liquid, which makes it an easy target for portfolio re-alignment by international investors. Therefore, there is always a potential threat of a direct impact on the exchange rate of the rand emanating from this source,” he added.
Finally, there are challenges posed by globalisation and regional cooperation.
“Regional cooperation is vital for success in our modern world, one that is becoming increasingly globalised. Although globalisation has brought many benefits, the painful experience emanating from the adverse developments in international financial markets is still fresh in our memories, and hence one cannot over-emphasise the importance of cooperation, particularly among central banks,” Mboweni said.
It is important that policy makers assess the current economic situation and establish the areas in which further action will be required. A lot has been achieved, but many economic challenges still remain,” he added. — I-Net Bridge