South Africa has few options to devalue its currency in the face of increased capital inflows and the race to do that by other countries could jeopardise global economic growth in the long term, the National Treasury said on Wednesday.
Currencies of emerging markets, including South Africa, have appreciated significantly as investors flock to fast-developing nations with higher interest rates in the wake of a global economic crisis that has seen developed nations slash their core rates to near-zero and print money in order to boost their fragile economies.
Other emerging markets have taken extraordinary measures to weaken their currencies including taxing capital inflows to discourage short-term investment.
The Treasury said South Africa, with foreign reserves of about $44-billion, did not have enough resources to fight the impact of higher capital flows on its currency.
“As a small open economy with low domestic savings and relatively high financing needs, South Africa cannot fully offset the impact of massive global capital inflows, barring a much sharper tightening of fiscal policy that diverts resources towards substantially larger reserve purchases.”
“Complementary policies to support sustainable gains in productivity and international competitiveness are also necessary,” the Treasury added, without being specific about what these policies are.
The Treasury has already been giving funds to the South African Reserve Bank to cover the high cost of reserves accumulation but its holdings lag those of other emerging market and are not enough to intervene meaningfully in the currency market in which the average daily turnover is over $4-billion.
Finance Minister Pravin Gordhan told journalists that the government would give further funds to the Bank for reserves accumulation.
“We are not going to give any numbers at this point in time we don’t want to indicate what we have in our pockets but government pocket are quite deep.”
SARB Governor Gill Marcus said reserve accumulation was about whether they could stop the rand from appreciating further.
“The first question about reserves’ accumulation is not about depreciating the currency but whether there are opportunities to stop it from appreciating further. That in its self is a big challenge, as you know we do not target a level of the exchange rate level,” she told journalists.
“Given what is happening in the global environment, rand strength is not just the strength of the currency, it’s a weakness of the US dollar and euro. So it’s a complex environment, any action that we do take, takes account of what’s achievable. We will continue to work with the Treasury on [the] issue,” Marcus said. She added there was need for coordination of policy.
The Treasury said unilateral currency devaluations in other economies could compromise global economic growth in the long term.
“Inappropriate short-term responses to global currency adjustments, such as competitive devaluations or increased trade protectionism, will entail longer term costs to economic growth.”
“A coordinated international agreement on currency realignment would help to minimise the negative effects of this rebalancing, especially for developing countries,” the Treasury added.
South Africa’s rand has gained about 27% since the beginning of 2009, hitting a 33-month high of 7,6724 on October 15, hurting exporting industries such as mining and manufacturing.
The Treasury said the strong rand, if sustained, would lead to “unbalanced growth, widening the current account deficit and increasing the economy’s vulnerability to shocks”.
It said the deficit on the current account would likely widen to 4,2% of GDP this year, compared with 4% in 2009 but strong capital inflows would ensure that the gap was adequately financed in the medium term.