Rand crisis test

THE GOVERNMENT MAKES little secret of the fact that it wants to get interest rates down further as soon as it can — not surprisingly, for it never intended to go into an election campaign on the back of negative economic growth produced by a prolonged credit squeeze. But to date the only thing that has moved the government to act has been a thundering currency crisis. When the Rand fell heavily in 1996 the RDP was effectively ditched and Gear was inaugurated. When the Rand fell again in 1998 both Mandela and Mbeki turned on the SACP, blaming the comrades for undermining the currency, and told them with great force that they must either stop criticising Gear or get out of the alliance. According to the Economist’s Big Mac index the Rand is currently 43 per cent undervalued against the dollar, a margin which can only be explained by the market’s attribution of a high political risk factor. The Russian rouble was, on the same basis, undervalued by 44 per cent, suggesting the ballpark South Africa is now in.

But if interest rates are brought down and the economy is reflated the balance of payments deficit will quickly swell and the Rand will fall, perhaps sharply. The worrying fact is that, at the very bottom of the economic cycle, South Africa has continued to run a current account deficit, essentially due to low commodity prices. As domestic demand recovers imports will rise and, unless foreign investment steps up, the current account deficit is bound to grow. Moreover, the markets are likely test the new President and the Reserve Bank governor. Thus we are quite likely to face another Rand crisis in the wake of the election, particularly if the markets are panicked by a two-thirds ANC majority. Unfortunately, this crisis could well coincide with Mboweni’s takeover at the Reserve Bank and be made to look like a vote of no confidence in a black governor. How would Mbeki and Mboweni react to a third Rand crisis? By signalling weakness to the markets, accepting a further devaluation without demur? By pushing interest rates back up? By kicking the SACP out of the alliance? By rescinding the new labour laws? There are no easy options.