Rand rout: What government should do

May 31 2013 18:11
Cape Town - President Jacob Zuma's speech, meant to soothe the fears of investors and markets, failed to stop the rand from plummeting to record lows after breaching the R10/$-mark for the first time since 2009 on Thursday.

In the light of this, said Nomura emerging markets analyst Peter Attard Montalto, it is worth considering what the president could have done on Friday, and what in general the government can do to allay jittery investors.

"We should consider that even though President Zuma's (rather late) intervention after the Marikana tragedy last year was much criticised, it still contained concrete policy areas of focus such as miner housing and conditions and miner indebtedness," said Montalto.

He considers it an exaggeration to say that the Zuma speech caused the rand's slide - which he attributes  to dollar strength - as it did not contain any real reassurances or new policy initiatives, but was "simply a call to continue discussions".

"However, the speech certainly did nothing to help and may well have caused markets to think that the government's response to the situation is to continue the status quo," said Montalto.

What is to be done?

He outlines the following measures that could rectify the situation:

• Announce that serious restructuring of the mining industry is needed, and that mining companies as well as unions have to compromise to secure the future of the industry, with the government undertaking help find jobs elsewhere in infrastructure projects, agriculture and similar low-skilled jobs.

The state should support the phasing of job losses over several years but make a commitment to the restructuring now, said Montalto.

• Reform collective bargaining and liberalise mining shaft level collectivisation agreements to liberalise labour policy and allow greater democratisation in the mining industry in particular.

The state should promote far greater direct integration of workers into management forums that are parallel to, but independent of, the collective bargaining and union recognition process, said Montalto, as well as having having much stronger direct lines of communication and reporting from the rock face up to management.

• Reform black economic empowerment in the mining sector with capital redirected to workers through real share-ownership schemes, said Montalto.

• Start implementing the reforms promised last year after Marikana, especially on mine worker housing and mine working conditions. The government should also ask unions to renegotiate the living out allowance to enable housing investment; Montalto suggested small tax breaks for companies to aid compliance. Banking access for migrant miners should be improved.

• Montalto said in the "very likely" event of job losses not being possible in the near term politically, an overhaul of the collective migrant labour system should be announced. The matter of dual family households for migrant workers should be dealt with "sensitively", said Montalto, with a reduction of the migrancy cycle from 12 months to three months.

• Give a clear sign that government does not favour the Association of Mining and Construction Union (Amcu) over the National Union of Mineworkers (NUM), especially in the light of ANC deputy president Cyril Ramaphosa and Mining Minister Susan Shabangu's remarks last week in favour of protecting the NUM.

"This could take the form of welcoming Amcu registration and calling for it to occur anywhere the union met the required limits," said Montalto.

•  "Announce a clear, targeted and timetabled NDP (National Development Plan) implementation plan that includes greater private sector involvement in investment and infrastructure with appropriate incentives," said Montalto.

• "Act as a price giver in platinum especially to restrict supply and boost the price" which would give leeway "to restructure the industry and fund investment in other jobs growth areas", said Montalto.

• Shabangu and Ramaphosa should go to London to meet with investors, said Montalto.

Montalto admits that "the political dynamic is nowhere near being able to deal with this list, especially with the election next year - with the exception of the last two points".

His sentiments remain bearish, said Montalto. "The government is attempting a muddle-through status quo ‘solution’. That can perhaps work until the election if luck is on its side, but beyond that the same structural problems are still there and still need to be dealt with.

"However, such a muddle-through is why we still see the possibility of a downgrade later in the year."

'Firecracker shock' needed

Turning to the South Afircan Reserve Bank (Sarb), Montalto said: "We think the Sarb should continue with its current policy of not standing in the way of risk premia shocks that are the result of government policy.

"The government needs a firecracker shock to change course, in our view. We doubt whether the currency could provide a more fundamental turnaround but it would strengthen the position of the likes of Pravin Gordhan and Trevor Manuel in the cabinet to push for a deeper solution and at the margin could be successful."

Montalto admits that this would take "some nerve" for the Reserve Bank to follow this course.

"To reduce volatility rather than target levels, however, it could target draining a little more liquidity from the system as well as a Mexico-style selling of dollar puts with very short maturity, which would make the market reduce volatility in the rand through delta hedging automatically."

Montalto concedes that the Sarb has in the past dismissed this kind of move as "too unorthodox".

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