Johannesburg - Calls by emerging market leaders for “collective action” at the Group of 20 (G20) summit, which starts in St Petersburg today, are not likely to succeed, according to local economists.
Heads of state from developing countries, including South African President Jacob Zuma, plan to hold their peers in advanced economies to account for acting only in their own national interests. Zuma and the representatives of countries like India and Brazil will call for policy co-ordination to contain currency volatility, triggered by the recent shift in US monetary policy. Weaker units in developing economies have seriously undermined their growth potential.
But how realistic is the request and what form can collective action take?
Stanlib chief Kevin Lings said there was not much global policymakers could do. “They can’t really impose capital controls across all emerging markets. That would prove unworkable.” And he predicted the response to the plea “is unlikely to contain significant or meaningful measures”.
Investment Solutions strategist Chris Hart said developing countries could collectively deplete their foreign reserves, selling US dollars to buy their own currencies. He said the sales of foreign exchange might be an option for India and Brazil which had large reserves but not for South Africa, with reserves that would cover only a few months worth of imports.
Standard Bank chief economist Goolam Ballim noted: “There are no global instruments to contain currency volatility, only local instruments and these come at a cost.” He was referring to interest rate hikes, traditionally seen as a way to support a currency as the higher rates attract foreign investment. However, higher rates also moderate economic growth and therefore can act as a disincentive to investors.
Central banks in several countries, including India, Indonesia and Brazil, are hiking rates but the SA Reserve Bank is not expected to do the same when its monetary policy committee (MPC) meets later this month. No move is expected until late next year.
Ballim argued that a communication failure by the US Federal Reserve and not any “impending policy action” had weakened emerging market units and destabilised their economies since May. He was commenting on the decision by Fed chairman Ben Bernanke to reverse monetary policy in the US, sucking money out of emerging markets. Remarks by Bernanke in May, signalling an end to the Fed’s regular liquidity boosts, sent financial markets into a tailspin.
The fallout weakened the rand from R8.90 a dollar early in May to more than R10.30 in recent weeks. Ballim argued that communication from the Fed should be more “nuanced”.
The weaker currency threatens to boost inflation and prevents any rate cuts to support growth. Forecasts for economic growth this year have been revised down from about 2.7 percent to 2 percent.
Other emerging market units have tumbled too. Lings said the rand had declined by “a substantial 18 percent against the dollar, the second-worst performing emerging market exchange rate this year. The Indian rupee is down 19 percent, the Brazilian real 14.1 percent, the Argentine peso 13.5 percent, Turkish lira 13.4 percent and Indonesian rupiah 12.1 percent.”
Lings said most of these countries had relatively large current account deficits – the gap between revenue from exports of goods and services and the import bill. A large deficit makes countries vulnerable to global sentiment as they depend on foreign investment to plug the hole in the current account.
Lings noted: “If a country has a large current account deficit then it is vulnerable to currency weakness. The best response is to ensure that this vulnerability does not materialise in the first place.” - Business Report