Talk is cheap
Verbal barrage at odds with the official data
WHEN A SOUTH AFRICAN central banker uses the phrase “to lean against the wind” with regard to the currency market, it sends shivers down the spine. That’s precisely the phrase former SA Reserve Bank Governor Chris Stals used in 1998 when he wasted US$10bn in a futile attempt to prevent the rand from weakening.
Of course, the current situation is radically different to what prevailed in 1998. However, Reserve Bank Governor Tito Mboweni and officials at a strategy meeting of the Bank’s Monetary Policy Committee on 8 June decided the Bank’s attitude towards volatility in the currency market should be to “lean against the wind”.
This time around – unlike 1998 – the issue is that the rand may have become too strong. The currency moved fast, going all the way from US$1/R9,50 to US$1/R8,50 in April and then in May, and early June briefly breaking through the US$1/ R8 level before trading slightly higher than that level at the time of writing.
When the rand broke through US$1/R8, Mboweni took the highly unusual step of phoning news agencies Bloomberg and Reuters to indicate the rand was reaching “unhelpful” levels. Of course, as a central banker, he couldn’t simply say: “I think the rand is too strong and I’m going to intervene in the market to try and stem the tide.” But that’s what his comments boiled down to.
However, what’s odd is that official statistics don’t bear out what Mboweni is saying. If the Bank had wanted to “lean against the wind” in May – when the rand had reached surprisingly strong levels – it would have bought US dollars in the market. Those dollars would have been bought in exchange for rand issued by the Reserve Bank. The additional demand for dollars and extra supply of rand would have worked to put a brake on the rand’s strength.
Such a move would have been evident from the Bank’s monthly release of its gold and foreign exchange reserves. One of the ways in which the Bank builds reserves is to buy US dollars in the market; this, then – in theory, at least – provides the Bank with dollars to use in future when it wants to do the opposite: fight rand weakness by selling dollars to dampen the greenback’s strength.
However, the latest reserves figures suggest the Bank was hardly active in the forex market, if at all. Some analysts were fooled by the rise of $1,7bn in the headline number of the Bank’s reserves; but there were technical reasons for that increase. The bulk of the increase reflects about $700m Government raised offshore with a bond issuance; that money went straight to the Bank and didn’t reflect activity in the currency market.
Most of the rest of the increase in reserves is due to valuation effects: a higher US dollar/gold price as well as the rise in the value of the euro the Bank holds in its reserves.
Rand Merchant Bank currency strategist John Cairns says: “Despite what others may be saying, I’m convinced the Reserve Bank didn’t buy US dollars from the market in any meaningful size in May. The $1,7bn rise in gross reserves can be accounted for by the $700m deposited at the Bank by the Government and $950m in valuation effects. That implies they bought a mere $150m – smaller than the $400m that would imply any real activity. The jaw-jaw nevertheless continues…”
Cairns doesn’t refer to that, but it’s significant that the Bank didn’t try to mop up the foreign capital inflows relating to Vodafone buying a bigger stake in Vodacom, which would have been an estimated $2,5bn. That the Bank allowed the flows to go through the market showed that – despite the rhetoric – it was happy to see the rand strengthen for a while.
Mboweni will now have to put his money where his mouth is or risk losing credibility. The Bank will have to become more active in the market. The question is: At what level of the rand will the central bank start buying US dollars? Given the inaction up until US$1/R8 – plus then the sudden verbal barrage – it would seem as if R8 is the magic level. However, Mboweni and his officials insist they don’t have a specific level in mind.
Wasted $10bn. Chris Stals Leaning against the wind. Tito Mboweni