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Johannesburg - The sharp appreciation of South Africa's rand poses a risk to the country's competitiveness, a Treasury official said on Friday.
"We cannot rely on the foreign exhange rate as a panacea for our competitiveness," said National Treasury director general Lesetja Kganyago, adding it was difficult to fight and withstand the global forces that have pushed the currency stronger.
Asked whether South Africa should consider capital inflow measures such as Brazil has adopted, he said the history of capital controls in South Africa has never been to penalise money coming in, but to stop money from leaving (the so-called financial rand).
"When we have capital flows, we mop them up. In this environment, only stupid money will leave, as growth is here," Kganyago said at the Reuters Economist of the Year breakfast.
He said the rand's sharp appreciation poses a risk to commodity exports and puts pressure on corporate profits. It is also harming competitiveness, but he expects the economy to continue its recovery over the medium term.
"The spotlight in South Africa has to be on microeconomic reforms to raise the productivity of capital and labour, aggressively improve the level of education and skills, enhance infrastructure development and increase competition," said Kganyago.
While South Africa has a gap between actual and potential output which protects it from the imbalances which occur in some emerging markets, Kganyago said the overvalued exchange rate could cause growth to become unbalanced. He added that counter-cyclical fiscal policy is required to contain overheating pressures.
Strong rand not all bad
"South Africa, as part of the G20, will continue to work towards achieving international agreement on orderly attempts to rebalance economic growth. The G20 needs to move from cyclical policies to structural policies to lift long-term growth trajectories," he added.
The South African Reserve Bank is responding to the strong rand but does not target a particular level for the exchange rate, chief economist Monde Mnyande said at the South African Chamber of Commerce and Industry (Sacci) annual meeting.
Mnyande also said any action the central bank took to deal with the rand ZAR=D3 would have to be consistent with its mandate of targeting inflation between 3% and 6%.
Mnyande also suggested that the disadvantages of the strong rand should be weighed against some of the advantages it brings.
"There is no point in having a weaker currency if the benefit for some sectors will be eroded by higher inflation," Mnyande said.
The strong rand, although affecting the competitiveness of local exports, has helped keep inflation in check, allowing the Reserve Bank to reduce rates.
Bank governor Gill Marcus said on Thursday that the stronger rand could also be used to the country's advantage in other areas.
Transnet and Eskom, which have multi-billion rand capital expenditure programmes, could import infrastructure needed at lower costs, she said.
Marcus also reiterated the bank's stance that it does not have a preferred rand exchange rate level.
Market forces are resisting attempted interventions by authorities. Currencies in emerging market economies - including South Africa - continue to strengthen on the back of dollar weakness and capital inflows.
On the local economy, Mnyande said that the downward phase in the business cycle had ended and that the country had entered a growth phase.
"South Africa's domestic economic activity has shown much resilience over the past six months. We remain optimistic that domestic growth will continue to remain resilient," Mnyande said.
"We cannot rely on the foreign exhange rate as a panacea for our competitiveness," said National Treasury director general Lesetja Kganyago, adding it was difficult to fight and withstand the global forces that have pushed the currency stronger.
Asked whether South Africa should consider capital inflow measures such as Brazil has adopted, he said the history of capital controls in South Africa has never been to penalise money coming in, but to stop money from leaving (the so-called financial rand).
"When we have capital flows, we mop them up. In this environment, only stupid money will leave, as growth is here," Kganyago said at the Reuters Economist of the Year breakfast.
He said the rand's sharp appreciation poses a risk to commodity exports and puts pressure on corporate profits. It is also harming competitiveness, but he expects the economy to continue its recovery over the medium term.
"The spotlight in South Africa has to be on microeconomic reforms to raise the productivity of capital and labour, aggressively improve the level of education and skills, enhance infrastructure development and increase competition," said Kganyago.
While South Africa has a gap between actual and potential output which protects it from the imbalances which occur in some emerging markets, Kganyago said the overvalued exchange rate could cause growth to become unbalanced. He added that counter-cyclical fiscal policy is required to contain overheating pressures.
Strong rand not all bad
"South Africa, as part of the G20, will continue to work towards achieving international agreement on orderly attempts to rebalance economic growth. The G20 needs to move from cyclical policies to structural policies to lift long-term growth trajectories," he added.
The South African Reserve Bank is responding to the strong rand but does not target a particular level for the exchange rate, chief economist Monde Mnyande said at the South African Chamber of Commerce and Industry (Sacci) annual meeting.
Mnyande also said any action the central bank took to deal with the rand ZAR=D3 would have to be consistent with its mandate of targeting inflation between 3% and 6%.
Mnyande also suggested that the disadvantages of the strong rand should be weighed against some of the advantages it brings.
"There is no point in having a weaker currency if the benefit for some sectors will be eroded by higher inflation," Mnyande said.
The strong rand, although affecting the competitiveness of local exports, has helped keep inflation in check, allowing the Reserve Bank to reduce rates.
Bank governor Gill Marcus said on Thursday that the stronger rand could also be used to the country's advantage in other areas.
Transnet and Eskom, which have multi-billion rand capital expenditure programmes, could import infrastructure needed at lower costs, she said.
Marcus also reiterated the bank's stance that it does not have a preferred rand exchange rate level.
Market forces are resisting attempted interventions by authorities. Currencies in emerging market economies - including South Africa - continue to strengthen on the back of dollar weakness and capital inflows.
On the local economy, Mnyande said that the downward phase in the business cycle had ended and that the country had entered a growth phase.
"South Africa's domestic economic activity has shown much resilience over the past six months. We remain optimistic that domestic growth will continue to remain resilient," Mnyande said.
