Since the “emerging market” crisis in 1997/98, the SA Reserve Bank has been loath to intervene in currency markets. As first Asian, then South American, then African markets got caught in the economic downturn, the Bank forged the impression this was an “Asian” economic crisis, rather than an “emerging market” one. Hence, it avoided intervening in currency markets, theoretically to soak up rand sales so it wouldn’t collapse and drag SA into the crisis.
From today’s perspective, this whole notion seems very odd.
Emerging markets now underpin the global economy, maintaining growth while established markets swoon. But this was before the emergence of India and China as global exporters and economic growth drivers. “Emerging markets” were a much smaller proportion of the global economic cake at the time, and the crisis was seen – except by its victims – as a kind of necessary correction to match overblown equity prices in countries such as Thailand, South Korea and Malaysia with reality. In its efforts to prevent the rand from falling, the Reserve Bank effectively bet on the currency by paying rand sellers in dollars which the bank had to buy. This failed miserably.
At this time the idiot, the knife and the gunfight gained currency, except of course the word “idiot” wasn’t used. Exactly how much the Bank lost isn’t known, and it’ll probably stay that way. After all, this is the institution that prints money. No doubt it ran into billions. More importantly, the SARB forfeited credibility because it played and lost. As it happened, SA emerged from the emerging market crisis only bruised, but the rand was in real trouble, exacerbated by the failed attempt to boost it. Then in 2001 it simply imploded in the wake of the “dot com” fallout. The cries of “intervene” were heard again, but this time the Reserve Bank didn’t even dare try.
The situation is now totally different. Where the Bank had an effective dollar liability, it now has gross reserves of close to $38 billion, enough to cover imports for close to five months.
This, the general attractiveness of higher growth emerging markets, and the “carry trade” – the simple process of borrowing money in places where interest rates are low and investing it where rates are higher – are pushing the rand to places it has effectively never been before. It doesn’t seem like it, because R6,70c still only buys you one dollar, but if inflation is unequal, the number of rands required to buy a dollar should move up just to stand still.
That has not been happening.
On top of that, the rand is up 25% against the dollar this year alone, with the result that more and more people are calling for the Reserve Bank to intervene again, despite all the unfortunate past history. Four economists, one academic and three associated with state institutions, this week wrote in Business Day calling for the reintroduction of intervention to weaken the rand, which is blamed for punishing the manufacturing sector. Shortly afterwards, Governor Tito Mboweni announced the Reserve Bank had been buying dollars to curb the rand’s appreciation and boosting foreign currency reserves “quite significantly” last month.
Coincidence? Or a shift in a decade-long policy?
By Tim Cohen
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