Rand threatens jobs

2010-10-23 09:06

Labour federation Cosatu this week intensified its call for authorities to intervene and devalue the strong rand to prevent job losses.

“We cannot grow the economy and create jobs with a strong rand. We also cannot build industries with an appreciating currency,” said Chris Malekane, head of Cosatu’s policy unit.

A weaker rand would relieve earnings ­pressure on exporters – particularly manufacturers, farmers and mining firms – and make them better able to keep their workers in ­factories and even employ new people.

A strong rand reduces the income earned by exporters on their US dollar sales and reduces their profitability, which has negative implications for jobs.

Malekane said government had to impose a Tobin tax on short-term foreign capital inflows to discourage speculators from entering ­local financial markets and sparking the currency’s appreciation. A Tobin tax is imposed by ­countries on foreign ­exchange transactions to deter speculation on currency fluctuations.

Malekane, who is also an economics ­professor at Wits University, suggested the ­Reserve Bank should become more active in ­accumulating foreign exchange reserves to ­arrest the rand’s strength.

He said: “We must also consider putting up currency controls to make it difficult for speculators to enter our financial markets because they do not invest productively.”

He warned South Africa could be hit by more job losses after shedding 1.2 million jobs last year due to the global economic recession.

In July, Statistics SA released its quarterly ­labour force survey, which showed that the ­economy culled 61 000 jobs in the second ­quarter of this year after the loss of 171 000 in the first quarter.

“If you look at the countries we aspire to be like, for instance the Bric (Brazil, Russia, India and China) countries, South Korea and ­Malaysia, we are number one in terms of job losses,” Malekane said.

His comments come amid rising concerns about a looming global currency war which could hurt the economic recovery and plunge the world into another recession.

Brazil, Thailand and South Korea have ­already taken steps to soften their currencies in a bid to give their exporters a competitive advantage in the face of exchange-rate ­appreciation brought on by massive inflows of foreign capital as the US dollar ­continues to weaken. This week Brazil hiked its Tobin tax on foreign purchases of ­fixed-income securities – to 6% from 4%.

A study by the International Monetary Fund has concluded, however, that the tax has been ­ineffective in preventing unwelcome ­inflows from entering the Brazilian economy.

South Africa’s finance minister Pravin Gordhan has also warned against measures to weaken exchange rates, preferring a global ­approach to dealing with the crisis.

Reserve Bank governor Gill Marcus said this week that she was unsure if direct intervention to weaken the “over-valued rand” would work.

She said any measures to soften the currency should be combined with targeted support for industries hit hard by its strength, through tax

concessions or subsidies.

Gordhan’s spokesperson, Jabulani ­Sikhak-hane, declined to comment on how the treasury was planning to tackle the rand’s strength.

Gordhan was among the world’s ­top 20 finance ministers and central bank ­governors who met at a G20 summit in Gyeongju, South Korea, recently to discuss ways of quelling the catastrophic currency war.

The rand has appreciated by 7.1% against the dollar this year and 5.5% on a trade-weighted basis, buoyed by a flood of foreign capital ­inflows from developed countries – where ­interest rates are near zero – into emerging economies in search of higher yields.

In his recently published paper titled How Much Stronger, For How Much Longer, ­Sanlam chief economist Jac Laubscher argues that this trend could be reversed only if ­economic growth improved in developed ­countries and the yield differential between rich and emerging economies narrowed.

“Closing the yield differential between ­developed and emerging markets is a necessary ­requirement to stem the flow of capital from the former to the latter,” Laubscher said.

The point made by Laubscher partly explains why attempts at softening the rand by cutting interest rates and accumulating foreign exchange reserves have failed to prevent capital inflows into the economy.

The yield difference between South Africa’s benchmark repo rate and the US’s Fed fund rate is too attractive to portfolio investors.

The local repo is 6%, while the Fed fund rate is 0.25%. This means that investors earn better interest income in South Africa than in the US.

Nedbank economist Carmen Altenkirch said: “Cutting interest rates will not make much of a difference because the gap between US ­interest rates and South African interest rates is big. You have to cut by a big margin to make it not worthwhile for investors to invest in South Africa.”

She wondered if it was wise for the Reserve Bank to rapidly accumulate foreign reserves because this strategy was expensive and had proved futile in arresting the rand’s strength.

“Accumulating reserves is costly, because you borrow at high cost and receive low returns from the US treasuries,” she said.

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