POLITICIANS would do well to brush up on their knowledge of the foreign exchange markets and the country’s monetary policy framework.
In a recent interview with ANN7, Jessie Duarte, the deputy secretary-general of the ANC, suggested that the Reserve Bank should protect the rand and it was not doing so because of private ownership.
“The South African Reserve Bank needs to cushion the rand, but the Reserve Bank itself is privately owned, and that is a difficulty,” Duarte proclaimed.
The fatal assumption she made was that the Bank could indeed defend the rand at all. In this regard, the record needs to be set straight urgently.
As simple arithmetic demonstrates, the Reserve Bank could prop up the currency for less than two months before all the reserves enabling it to do so ran dry.
Even then, such support would have limited effect.
The rand is one of the most highly traded currencies in the world’s $4-trillion-a-day foreign exchange market.
John Cairns, a currency strategist at Rand Merchant Bank, estimates that average daily onshore and offshore trade in the rand is in the region of $50bn.
That is $50bn worth of rand traded every day in various financial instruments across the foreign exchange markets.
Contrast that to the position of SA’s gross gold and foreign exchange reserves at the end of March 2016: in comparison they were a relatively paltry $47bn.
In other words, the country’s entire pot of reserves is less than the daily trade in its currency.
Trade of $1bn would have some effect on the rand, says Cairns, but this would mean the Reserve Bank could provide some cushioning for just 47 days.
In short, the Reserve Bank would come out second best in a fight with the market.
It knows as much. The Bank’s institutional memory is robust enough to remember how former governor Christian Stals depleted the country’s foreign exchange reserves in a failed attempt to prop up the currency.
Despite Stals’s best efforts, the rand declined steadily during the 1990s. Then on October 14 2001, amid intensifying rand weakness, the Bank issued a statement that, rightly or wrongly, was interpreted by the market to signal possible interference by it in the foreign exchange market.
This worsened the currency’s decline — as the commission later set up to investigate the reasons behind the rand’s blowout in 2001 found.
“The commission places on record that the volatility and the rapid depreciation of the currency continued and in fact accelerated during the last quarter of 2001, especially after the October 14 2001 statement,” the commission said in its August 2002 report.
This does not mean the Reserve Bank should be indifferent to exchange rate movements. And it certainly is not. As recently as August 2015 — as the rand, along with emerging market peers, swung every which way in the face of slowing growth in China and a looming US rate hike — the Bank said it might consider becoming involved in foreign exchange markets to ensure “orderly market conditions”.
But it was quick to highlight its commitment to allowing the exchange rate of the rand to be set by market forces. This is, after all, in keeping with the explicit inflation targeting focus of the monetary policy framework that SA adopted in 2000. Broadly speaking, the Bank’s mandate is to maintain price stability by keeping inflation within its target range. Suggesting that it should target the currency pays no regard to history or economics.
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