The U.S. Federal Reserve must ensure “minimal damage” to emerging markets from plans to reduce bond purchases, South African Finance Minister Pravin Gordhan said.
Fed Chairman Ben Bernanke, who will speak at a press conference after a two-day policy meeting today, must communicate his intentions carefully, Gordhan said in an interview with Bloomberg TV in Johannesburg today.
Bernanke’s comments on May 22 that the Fed may slow the pace of its bond purchases roiled financial markets as currencies plummeted. The South African rand has slumped 9.7 percent against the dollar since the beginning of May, dropping to a four-year low of 10.3692 to the dollar on June 11.
The Fed’s action may have “significant impacts on the rest of the world” and Bernanke should “be aware of the spillover effects, communicate more carefully what exactly is your intention and, thirdly, manage the tapering off process in a way that causes minimal damage to our economies at the end of the day,” Gordhan said.
The rand gained 0.5 percent against the dollar to 9.9463 as of 4:07 p.m. in Johannesburg.
South Africa’s government is concerned about the effect of capital outflows as investors reduce their holdings in riskier, emerging-market assets in favor of dollar assets, Gordhan said.
“It’s outflows that we are concerned about now and the sudden depreciation of currencies, the sudden drop in the commodity markets, all of which creates unnecessary volatility and unwelcome uncertainty,” he said.
The rand is the most likely currency to weaken against the dollar as a tapering off of the Fed’s quantitative easing becomes inevitable, Geoffrey Yu, a senior currency strategist at UBS AG, said in an interview with Bloomberg TV in London today.
“South Africa is most at risk,” Yu said, while the Turkish lira and the Brazilian real are other currencies that could suffer. “You’ve seen the volatility already. Even if they delay tapering for a few months or so, it’s only putting off the inevitable. A lot of investors may say, ’I want to get out while I still can’.”
Labor unrest in the mining industry is also undermining the economic outlook in South Africa. Strikes that shut platinum and gold mines last year shaved 0.5 percentage point off gross domestic product and a further 0.3 percentage point off this year’s output, according to the National Treasury.
“We need to understand that there are new dynamics in the labor movement, there are different organized elements that have emerged,” Gordhan said. “The responsibility as government is to ensure that, where it is necessary, the labor relations system is adapted.” The government must “normalize the labor relations environment and turn the industry back to organized collective bargaining.”
The Association of Mineworkers & Construction Union has overtaken the National Union of Mineworkers as the biggest labor group in South Africa’s platinum industry and is demanding separate talks on wages. The NUM is in an affiliate of the Congress of South African Trade Unions, which is a political ally of the ruling African National Congress.
South Africa has the world’s biggest known reserves of platinum and chrome and also mines for gold, coal and diamonds.