Thr Rand: The Day The Bottom Dropped Out

Will the rand panic slow Mandela's exchange-control reforms?

What havoc rumors can wreak. Word had it that someone at the British Embassy in Cape Town saw an ambulance parked outside Nelson Mandela's residence and concluded that South Africa's 77-year-old President had suffered a heart attack. It turned out the near-mythical leader was just fine. His currency, however, was not. The false alarm triggered panic selling that on Feb. 16 took the rand to an all-time low of 3.9 to the dollar--a drop of nearly 10%.

Another rumor, less easily disproved, also fueled the run on the rand, which continued into the following week: that foreign exchange controls were about to be abolished in one fell swoop. This unfounded speculation led traders to dump rands (chart), anticipating a mass exodus of long captive capital. So besides shattering months of currency stability, the rand's plunge has called into question the timetable for one of Mandela's key economic liberalization measures: lifting limits on taking money out of South Africa that date back to the days of apartheid.

STEP BY STEP. Virtually everyone agrees that if the country is to rejoin the global economic club, exchange controls must go. But business people are divided over how fast. Some private-sector economists advocate a "big bang" that would end the uncertainty over timing and allow free-market forces to have their way with the rand. Others applaud the government's gradual approach--precisely to avoid the market volatility of the past several days. "The last thing you want is to have major capital outflows, total collapse of the currency, and then a setback to further liberalization," says Dennis Dykes, chief economist at Nedcor Bank.

In response to the panic, officials have made it clear that their step-by-step program is intact. "The lifting of exchange-control regulations is now only a matter of timing and detail," Mandela said on Feb. 20. Finance Minister Chris Liebenberg agreed that there had been no change in the government's commitment to reform. And central bank governor Chris Stals called rumors of a big bang to end controls "preposterous."

So far, reform has gone smoothly. It began last March with the peaceful demise of the "financial" rand, in which foreign investors conducted their transactions. Then asset swaps were approved, allowing pension funds, mutual funds, and insurers to place money overseas if they channeled matching investments to the Johannesburg Stock Exchange and got central bank approval. After an estimated $5.5 billion worth of foreign capital flowed into the country in 1995, the government had enough foreign exchange reserves to defend the rand if necessary as it took the next big step: removing capital controls.

Under apartheid, exchange controls ensured that South Africa's two main sources of capital, white-controlled companies and their white investors, couldn't take their assets and run. But today, relaxing controls is considered critical to the government's goal of opening the economy. For one thing, the heads of South Africa's huge conglomerates are unlikely to spin off holdings--which would improve competition and create opportunities for new black capitalists--until they can use the proceeds to pursue core businesses overseas. Exchange controls also spook foreign investors, who don't like the heavy hand of government on their assets.

MOVABLE CASH. The next phase in the process is expected to be announced during the second quarter, after the budget is unveiled in mid-March. Financial institutions, with holdings estimated at about $135 billion, could be allowed to invest a specified portion, perhaps 10%, of their cash flow overseas. Another measure might permit importers and exporters to open foreign currency accounts, possibly through the central bank at first and later at commercial banks and overseas. Eventually, foreign companies will be able to borrow in South Africa, an enticement for investment. Two or more years hence, controls may be lifted from individuals, who are limited to taking out $6,200 a year as tourists.

With gross domestic product growth estimated at 3.5% to 4% for this year and inflation between 6% and 8%, the lowest rate in two decades, the government seems unlikely to risk upsetting the economic apple cart, either by speeding up liberalization or slowing it significantly. Meanwhile, currency swings are something the country will have to get used to--whether they're caused by a false medical emergency or by real financial reform.

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