The bond market can make or break nations
AN ARTICLE on April 11 takes issue with Mr Yonela Diko comparing Paul Volcker with Malusi Gigaba, the new finance minister.
Volcker was a Fed chairman equivalent to our Reserve Bank governor. Both expected to be independent when making interest rate decisions.
Whereas the treasury position in the US is not considered a key position, as that of the Fed in South Africa and the UK it is the opposite.
It is all about the bond market that can make or break (see Greece) nations.
When economists talk of a steady pair of hands be it Trevor Manual or Pravin Gordhan this is what they’re talking about. To calm the bond markets because we have to borrow externally to finance our expenditure over taxation and internal savings. We can borrow either in foreign or local currency.
South Africa is not a large economy by any standards, but it has the ninth most tradeable currency in the world.
Investors can dump the rand easily on the whim of a rumour. This is the danger of our own making since 1995.
The Indian rupee was 40 to the dollar in 1998 and gradually depreciated over 20 years to 65 to the dollar.
India has now the highest growth rate with a currency that is slowly depreciating without stoking inflation or investors pulling money out.
They cannot as the government will not turn the rupee into a gambling chip where Mr Diko speaks eloquently of speculative investments, as opposed to fixed investments. We need more of the latter than former.
Best to have a stable depreciating currency, as it attracts fixed investments due to certainty in a longterm stable investment environment.
Both local and foreign companies benefit. China pegged its currency from 1994 to 2005 to the dollar at a competitive rate 8-50 yuan to the dollar and saw spectacular growth. Foreign companies poured into China. It looks as though it is India’s turn now.