Reserve Bank roulette

THE FLAP OVER Tito Mboweni’s appointment to succeed Chris Stals at the head of the Reserve Bank has shielded Stals from the criticism he deserves for his disastrous handling of the Rand crisis. Given South Africa’s tiny foreign reserves (under $5 billion), it was always ludicrous to imagine that using those reserves to buy forward contracts guaranteeing the Rand’s exchange rate against the dollar would do anything other than waste money. But this was exactly what Stals did. By July 3, when Stals finally announced he would cease this disastrous tactic, he had run up more than $25 billion of such contracts, uncovered by assets.

Now these contracts have to be redeemed at exchange levels of the Rand that seem quite wishful. As Stals desperately tries to massage the Rand back up a little nearer to the level set in those forward contracts, he has jacked interest rates up sky high. The whole economy is being thrown painfully into reverse in an attempt to minimise Stals’s gambling losses.

Stals has tried to silence murmurs of disquiet by referring to his critics as “naïve and simplistic”, but this won’t do. In September the IMF — quite exceptionally — publicly rebuked the Reserve Bank’s handling of the crisis. The IMF pointed out that, like all other emerging markets, South Africa merely faced a contagion problem from Asia. It could sit tight, bow with the wind and allow fundamentals to reassert themselves once the storm blew over. Instead the bank had unnecessarily created a South African financial crisis all its own.

When other reserve bankers have played their hand so disastrously, their resignation or dismissal has usually been automatic. Nick Leeson brought bankruptcy on his employers, Barings, by losing rather less than $1 billion of its money, after all, while the country’s losses from Stals’s foolish gambles are going to be many times that. The lesson for Mboweni is don’t blame “speculators” and don’t play Canute. With transactions in world forex markets now running at $1.6 trillion a day even a famous speculator such as George Soros is a minnow and chances of winning bets against the tide are zero.

If Stals had done nothing and let the Rand find its own level, the exchange rate would probably be much the same as it is today — but the country would be billions of dollars better off.