Johannesburg – The rand has slumped on Wednesday after Finance Minister
Pravin Gordhan said he would build reserves and ease exchange controls to tackle its recent strength.
In late trading, the rand was down 2.5% against the dollar (R7.08) and 2.7% lower to the pound (R11.15) - the currency's steepest drops in months.
Delivering his medium-term budget to Parliament, Gordhan outlined some strategies on how the country could dampen the effect of high levels of capital inflows.
"As many emerging economies, South African producers are currently under pressure because the strength of the real exchange rate reduces competitiveness of manufactured exports and lowers the cost of imports," Gordhan said.
"We appreciate that sustained exchange rate over-valuation creates difficulties for many businesses and threatens jobs in some sectors. It can lead to unbalanced growth, widening of the current account deficit and increase vulnerability to economic shocks."
He outlined a strategy to relax exchange controls as part of what it called a plan to tighten fiscal and loosen monetary policy.
Abolished
South Africans would now be able to move R4m out of the country each year as opposed to a R4m lifetime limit.
"Effectively exchange controls for individuals have been abolished," said Braam Jordaan from the FirstRand Alternative Investment Management (FRAIM) group.
Michael Jordaan, CEO of First National Bank (FNB), commented on micro-blogging site Twitter: "Individuals can now take R4m out of SA every year. Not many people have that type of cash. Effectively this dismantles ExCon (exchange controls). Positive."
Gordhan also told journalists the government will give further funds to the South African Reserve Bank to build up reserves but did not give figures.
Reserve Bank Governor
Gill Marcus said reserve accumulation was aimed at stopping further rand appreciation.
"The first question about reserves accumulation is not about depreciating the currency but whether there are opportunities to stop it from appreciating further," she told journalists.
However Gordhan and Marcus agreed that South Africa cannot fully offset the impact of massive global currency inflows.
South Africa, with foreign reserves of about $44bn, did not have enough resources to fight the impact of higher capital flows on its currency.
Mother Christmas
Gordhan said that capital inflows to emerging markets also had a positive effect on the domestic economy that had to be harnessed.
"It's enabled the governor (Marcus) to be Mother Christmas early. It has enabled agencies like Eskom and Transnet to bring in capital goods. It's kept inflation down," said Gordhan.
Gordhan stressed, however, that while emerging markets try to figure out ways to protect domestic interests, the leaders of the 20 most developed nations (G20) needed to come up with a "coordinated international agreement on currency realignment".
Emerging market currencies, including the rand, have soared in value as investors faced with minimal interest rates in crisis-hit developed economies seek higher returns elsewhere.
Countries such as Brazil and Thailand have taken extraordinary measures to weaken their currencies including taxing capital inflows to discourage short-term investment.
A tax on inflows into the bond market would not work for South Africa as it could raise the cost of funding, National Treasury Director General
Lesetja Kganyago said on Wednesday.
"It might sound like a good politically correct idea, but I do not see it working," Kganyago told Reuters in an interview.
"When you do this you might be shutting down a significant proportion of bond players in your bond market. The fewer players there are, the less liquidity you have and the less liquidity you have the more difficult it is for you to fund your borrowing requirement."
Kganyago said with 60% of turnover on the rand done abroad, such a tax would not be effective.
Cautious move
Analysts said the government had made a cautious move on the rand, which has gained about 27% since the beginning of 2009, hitting a 33-month high of 7.7624 on October 15 and hurting export industries such as mining and manufacturing.
"A meaningful albeit cautious move on the currency for South Africa, which will still lag the global currency war," said
Peter Attard Montalto, emerging markets economist at Nomura International. "Today's move should make investors think twice about the rand being a one-way bet but equally does little to dampen its attractiveness overall."
- Fin24 and Reuters