JOHANNESBURG (Reuters) - South Africa’s Finance Minister warned on Tuesday that global trade conflicts could emerge due to ‘currency wars’ as countries seek to keep their exchange rates competitive.
His remarks came as central bank Governor Gill Marcus said separately that the Reserve Bank would act to alleviate some of the pressure on its own exchange rate by purchasing foreign direct investment inflows either through direct transactions or from the market. However, the bank’s options in response to the rand’s strong gains against the dollar were limited, she said.
Marcus said recovery in Africa’s biggest economy after last year’s recession was fragile and “extraordinary measures” were needed as current growth rates were insufficient to have a marked impact on unemployment of around 25 percent.
Global tensions over currency rates are rising as emerging markets try to fend off a flood of fund inflows seeking higher returns and countries scramble to keep the prices of their exports competitive.
Finance Minister Pravin Gordhan urged G20 finance ministers meeting in Seoul this week ahead of a November summit to put the interests of the global economy ahead of their national interests during their deliberations.
“The danger that we face ... is that in an effort to keep our own countries going, where each country tries to become competitive on the basis of the so-called competitive currencies, that will result in a currency war,” Gordhan told a conference in Johannesburg.
“If we carry on this road it could result in a trade war, and then each country is going to put up barriers. And that which we’ve enjoyed as reasonably free trade is something that we are likely to lose in this period.”
South Africa’s government has resisted calls from its labour union allies to intervene aggressively to weaken the rand, saying this would be costly and the exchange rate should be determined by the market.
The rand has gained about 27 percent since the start of 2009, buoyed in large part by portfolio inflows and heightening concerns this is hurting South Africa’s exporters in particular and the key manufacturing sector as a whole.
Latest data from the JSE securities exchange shows foreigners injected 3.68 billion rand in net purchases of South African bonds in the week to October 15. That brought the cumulative net tally so far this to 70.8 billion worth of bonds — a 477 percent surge from the same period last year.
Central bank Governor Marcus told investors in Cape Town that while there was no doubt the rand was overvalued, there were no guarantees intervention in the market would work.
“There are no clear-cut or easy choices. All options involve significant costs and trade-offs,” she said.
“Direct intervention is expensive, and is not always effective under current extraordinary circumstances. Controls on capital inflows also have a questionable track record in terms of their effectiveness in reducing the amount of inflows, or the impact on the exchange rate.”
The bank was working with the Treasury, examining the effectiveness of what other countries were doing, she said.
Marcus said South Africa’s monetary policy was expected to remain relatively accomodative for some time, depending on changes in the inflation outlook.
The central bank has slashed interest rates by 600 basis points since December 2008 to help the struggling economy as the inflation outlook remained favourable.
Some analysts say the strong rand allows the bank possible room for another rate cut at its last policy meeting of the year, on November 17-18, although the market is still divided on whether this will materialise.
“While we think the “window” for rate cutting is closed, we do not see it as locked,” said Peter Attard Montalto, an analyst at Nomura International. “The doves on the monetary policy committee may be able to engineer a rate cut if the rand breaks meaningfully below 7.0.”
The rand was trading at 6.9835 at 1451 GMT on Tuesday, down 1.5 percent on the day as commodity-linked currencies were hit by China’s surprise rate rise.