South African Finance Minister Pravin Gordhan said the rand is undervalued and joined central bank Governor Gill Marcus in calling on the U.S. Federal Reserve to take account of the impact its decisions are having on emerging markets.
The Fed’s failure last week to acknowledge the volatility in emerging markets was “regrettable,” Gordhan said in an interview today at a conference hosted by Bloomberg LP in Johannesburg. Marcus said in a separate interview that it’s in the Fed’s interest to ensure less turbulence in developing nations.
The rand has slumped 6 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg, adding to its 19 percent depreciation last year. Emerging market currencies have come under pressure since the Fed began reducing its monetary stimulus that’s helped to fuel capital inflows. South Africa’s economy has also been buffeted by slower global demand and a series of strikes in the mining and manufacturing industries.
“We need to ensure that these peaks and troughs in sentiment are avoided because they’re neither good for the financial markets, nor are they good for the real economy, but more importantly not for the citizens of our country,” Gordhan said.
The rand was little changed at 11.1223 against the dollar at 3:05 p.m. in Johannesburg.
“When the advanced economies were really at the depth of the crisis, it was the emerging markets that helped stabilize, that helped create some balance to the global outlook,” Marcus said. “The challenge here is if the advanced economies say OK, you are on your own, the scale of the emerging markets is such that it’s going to impact on this fragile recovery.”
The South African Reserve Bank unexpectedly raised its benchmark interest rate by half a percentage point to 5.5 percent last week as it forecast the weaker rand will push inflation above its 3 percent to 6 percent target. The move failed to stem the rand’s decline, with the currency sliding 2.5 percent against the dollar after the rate decision on Jan. 29.
Marcus said she’s not sure why last week’s move was a surprise to economists. Further rate increases are not “automatic,” she said.
While a weaker rand is adding to pressure on inflation, it may help benefit exporters.
“We did want a weaker rand,” Nonkululeko Nyembezi-Heita, outgoing chief executive officer of ArcelorMittal South Africa, the continent’s biggest steelmaker, said at the Bloomberg conference today. “We would have preferred it to come when global demand was strong.”
The rand is acting as a shock absorber in the economy and the pass-through from the currency to inflation has been less than the central bank estimated, Marcus said. Last week’s rate increase wasn’t aimed at bolstering the rand, she added.