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Soothing noises from finance minister obscure the fact that SA currency is very vulnerable, says Patrick Bond.
Johannesburg - In its most recent world public opinion survey, the Pew Research Centre found that only a third of South Africans identified “international financial instability” as a major threat (third highest, after climate change and Chinese economic competition) compared to 52 percent of those polled globally.
Our relative ignorance is a shame, for since freedom was won in 1994, the rand has within a few weeks collapsed seven times – by 15 percent – a miserable record bested only by the late Zimbabwe dollar. I think our society’s blasé attitude reflects soothing messages coming from the financial industry and its government allies.
For example, in late August as the rand started to tank, Finance Minister Pravin Gordhan intoned: “We have a floating exchange rate, which will be able to absorb some of the shocks emerging from events that we have little control over at this time.”
It is precisely because the rand “floats” without the flotation device protection we had in earlier years – especially local exchange controls (the “finrand” from 1985-95) and the US financial regulations that the Clinton administration destroyed during the late 1990s so New York bankers could earn higher profits – that our currency is so very volatile.
The “float” will get far more turbulent once the vast balance of payments deficit – caused by a flight of profits and dividends to former South African companies now mainly listed on overseas stock markets – pushes foreign debt above $150 billion.
That point will arrive next year, leaving us the same ratio of debt to gross domestic product that PW Botha encountered 30 years earlier (after which nothing could stay the same).
But Gordhan sometimes shows a panicky side. In a Financial Times interview during a US monetary policy conference last month, he complained of his peers’ “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment”.
The following week, at the St Petersburg G20 meeting, Gordhan joined others in the Brazil-Russia-India-China-South Africa (Brics) network to congratulate themselves about a forthcoming Brics New Development Bank and contingency reserve arrangement (CRA).
But now we must ask: will Brics strategies prop up – or instead help collapse – the global financial architecture? After all, one of the CRA’s objectives, according to Treasury officials, is to “complement existing international arrangements”.
A $50bn Brics bank capitalisation would not initially challenge the World Bank (which lends almost that much every year). And a $100bn CRA would quickly be exhausted in the event of a more serious financial meltdown.
These sums are pitiable amounts to face off against emerging-market financial melting of the sort witnessed since the mid-1990s, when many countries began begging for $50+bn packages overnight, so as to halt financial looting.
In recent weeks, trillions of dollars worth of paper assets have shifted around, driving quite intense currency crashes in most Brics nations.
The reason: an announced change in US Federal Reserve policy by which a bit less artificial monetary stimulation will be provided to banks.
As a result, interest rates more than doubled over a few weeks, leading to vast outflows from emerging markets and the crash of the rand, the Brazilian real, the Russian rouble and the Indian rupee.
Yet one Brics member will potentially thrive, and in my visit to three Shanghai universities last week to discuss the brewing economic crisis, I was struck by how insistent Chinese scholars were in defending the “reform-minded status quo” (sic) strategy.
Given China’s desire to stabilise the inequitable system, by continuing to support the dollar through Treasury Bill purchases, it is reasonable to doubt whether Brics leaders are really serious about challenging the Bretton Woods system, which governs global financial relations.
After all, an alternative institution was already in place: the Venezuela-based Bank of the South, which already has $7 billion in capital. It offers a more profound development finance challenge to the Washington Consensus.
Meanwhile, South Africa’s own precursor to the Brics bank – the Development Bank of Southern Africa (DBSA) – has been run in a “shoddy” way, according to chief executive Patrick Dlamini last December. Dlamini then announced a 40 percent cut in staff, starting with environmentalists and social specialists, and a move to finance more infrastructure privatisation.
But the record remains messy, with Dlamini admitting this week that the DBSA had a R830 million deficit in 2012-13 due to “impairment losses on development loans of $1.6bn and revaluation losses on financial instruments of R403m”. Its lending volume last year was only R18bn, after reaching R34bn two years earlier.
Infrastructure privatisation will make it worse, as we’ve seen in the prolific waste and corruption in Gauteng e-tolling, the Gautrain, the Airports Company of SA and the forthcoming Durban dug-out port (which Transnet wants fully privatised). Our local precedent for a Brics bank now operates no differently from Washington’s disreputable model.
On the other hand, while the world economy is now working against Brics, the turbulent geopolitical relations between the Brics and the G7, the group of seven developed nations, actually left Russia far stronger after the G20 summit.
In St Petersburg, the Brics unanimously backed Vladimir Putin’s attempt to peacefully revolve the Syrian crisis once chemical weapons were apparently used by Bashar al-Assad’s regime against rebels, leading to Barack Obama’s threat to bomb Damascus. Obama had to back down.
Brazil also took a tough stance against the US National Security Agency; President Dilma Roussef was so furious about Obama’s snooping on her (and parastatal oil giant Petrobras) that she cancelled a Washington trip scheduled for next month. A new internet cable will soon link Brics countries directly so as to avoid routing through the spy-saturated US.
But the “talk-left” that is so common in the Brics foreign policy milieu is invariably negated in the “walk-right” by treasury and central bank officials.
So the dangers grow, not because of a South-North political confrontation, but because of the lack of an economic one.
* Patrick Bond directs the UKZN Centre for Civil Society.
** The views expressed here are not necessarily those of Independent Newspapers.