Perilous orthodoxy
SA must let go of dogma in favour of creative and well-informed pragmatism
ater this year US Federal Reserve chair Janet Yellen will raise interest rates. It might come in April, July, or August. But it will come. When it does, the Fed will have completed its long transition from increasing the supply of money by almost R1 trillion a month to paying to hold it.
Mario Draghi, chairman of the European Central Bank (ECB), will be doing the reverse. On January 22, the bank announced it would increase the European money supply at a rate of almost R800bn/month. Between Draghi’s decision and Yellen’s, emerging markets such as SA will recover some of the flows of short-term capital that left it in anticipation of the US rate rise — and then lose them again.
Thus, the rand will likely strengthen and then weaken. Whatever the temporary uptick after the ECB’s decision will be, when the Fed acts the rand is likely to fall. The question is how far and how fast. For that, last year’s final quarter’s trade numbers were alarming. With an oil price falling even faster than the rand, our current account deficit remained at around 6% of GDP — well above a prudent range, particularly as it is financed by short-term capital flows. Our exports became cheaper and our imports more expensive, but our goods and services still could not compete, and the trade gap remains.
If the trade balance stays unresponsive, or if the rand rises briefly and then falls sharply, we face the risk of a vicious cycle. Further declines when shortterm inflows slow, stall or reverse, are probable, and some domestic investors may become skittish and seek to place more money abroad. In the worst case, portfolio managers may lose confidence and rush for the exits, in what might be called a “disorderly adjustment”.
If this happens, a decrease in the value of the rand will not be the direct fault of the Reserve Bank governor or government. But that does not mean the Bank or the treasury will be without blame. There are clear policy steps they might have taken to avert this outcome. Undoubtedly, the usual voices will trot out the usual litany, and monetary mismanagement will be blamed on wages and labour regulations.
In reality, both the mistakes and the means to fix them lie elsewhere. For the past three years the Bank has stopped building its foreign currency reserves, despite accumulating vulnerabilities. It should have been doing the reverse, especially with the rand clearly overvalued at anything less than R10/US$. At the same time, government, parastatal and corporate borrowers have increased dollar borrowing.
Our hard currency reserves of US$48,7bn are far below those of India, Brazil, Chile, Malaysia, or any other Asian country, when compared with the size of our economy, our current account deficit or our foreign borrowing. Foreign debt, by comparison, has doubled in the past decade, to above $60bn.