Johannesburg - Reserve Bank Governor Lesetja Kganyago warned that it was still uncertain to determine whether the rand would sustain current levels as it remained vulnerable to global factors as well as domestic risks, including a possible ratings downgrade.
Addressing an investor conference in New York on Tuesday, Kganyago said predicting the rand was extremely difficult, given the multiplicity of factors affecting it.
The rand remained an important determinant of inflation, and therefore the Reserve Bank needed to make a careful assessment of the risks. Kganyago said this was complicated by the fact that the pass-through from the exchange rate to inflation appears to have declined in recent years.
Margins
“Given the pressure this places on the margins of South African firms, the monetary policy committee has been concerned for some time that this could reverse at any stage.” The rand has appreciated by 15 percent against the dollar since the start of the year, and was recently the strongest performer among emerging market currencies.
The appreciation has been attributed to the worldwide search for yield prompted by the negative yields being offered by many developed government bonds.
Kganyago said before the appreciation, the rand started off the year in a particularly vulnerable spot, with risk perceptions raised after President Jacob Zuma in December fired Nhlanhla Nene as finance minister and replaced him with unknown MP David van Rooyen.
The move unleashed turmoil in the market, resulting in Zuma replacing Van Rooyen four days later with Pravin Gordhan.
He said this was followed by renewed concerns in January regarding the outlook for the Chinese economy. The rand's appreciation had been pronounced against troubled advanced economy currencies, but less so compared to other commodity producers and emerging market economies.
“The Chinese economy appears to have stabilised, capital flows to emerging markets have resumed, and US monetary policy has remained on hold. Domestically, the positive second quarter growth outcome and the significant narrowing of the current account deficit, and more recently the large M&A transaction in the market also helped to underpin the rand’s recovery.”
Last week, the competition commission approved the takeover of SABMiller by Anheuser-Busch InBev for R103 billion.
Kganyago said questions had been raised recently as whether the bourse would be purchasing dollars in the transaction. He said first, the central bank remained committed to a flexible exchange rate, determined by market forces.
“However, in the event of abrupt movements in the rand exchange rate that could threaten the orderly functioning of the markets, the Reserve Bank will consider becoming involved.”
Kganyago said in the case of inflows such as foreign direct investments or M&A related inflows that displayed more permanent characteristics, the Reserve Bank could seek to increase its foreign exchange reserves.
BUSINESS REPORT