JOHANNESBURG, JACKSON HOLE — Finance Minister Pravin Gordhan has called for radical action to arrest the meltdown in emerging-market currencies, saying the top global policy makers must tackle the crisis more aggressively.
Calling for action on global capital flows and currency volatility, Mr Gordhan told the Financial Times there was an "inability to find coherent and cohesive responses across the globe to ensure we reduce the volatility in currencies in particular, but also in sentiment".
Countries such as Brazil, India and Indonesia have been hit by weakening currencies and falling financial markets, while the rand has dived against the dollar this year, making it one of the world’s worst-performing currencies.
On Monday, in late afternoon trading, it was at R10.22/$. Rand Merchant Bank currency analysts said in a note that general global market factors supported the rand for now, but gains would be held back by the local labour situation and pressures on selected emerging market currencies. "The rand is at the uncomfortably high end of the range."
Mr Gordhan’s comments show renewed anxiety about the global financial system as a potential slowdown in the Federal Reserve’s $85bn-a-month of asset purchases spills over into a fresh bout of emerging market turmoil.
"There’s no doubt that the multilateral institutions that participate in, and often work for and with, the Group of 20 need to desperately try to come up with new answers and do some heterodox thinking to find a new framework which will enable us to embrace the current environment, create less volatility," Mr Gordhan said.
His remarks were echoed by other developing-country policy makers at the Kansas City Fed’s symposium in Jackson Hole, Wyoming, at the weekend. "The volatility of (capital) flows has been very pernicious and to some extent unconventional monetary policies have affected such volatility," said Agustín Carstens, Mexico’s central bank governor.
Low interest rates in rich countries had created opportunities for "massive carry-trade strategies" that led to "large short-term speculative capital inflows", he said. He called on advanced countries to make a more predictable exit from easy policy, to co-ordinate their movements, and beware the spillover effect of their actions.
On Friday, Christine Lagarde, head of the International Monetary Fund, said the world needed to build "further lines of defence" against a possible emerging-markets crisis.
Mr Gordhan said that while it was understood that "you cannot manage all of these phenomena in a fine-tuned way", policy makers needed to "come up with better answers" to reduce volatility and create more predictability.
But policy makers at Jackson Hole did not have many answers for Mr Gordhan. "As much as we may like to find it, there is no master stroke that will insulate countries from financial spillovers," said Terrence Checki, the head of international affairs for the New York Fed.
Emerging markets worldwide have been scrambling to come up with new support measures in foreign exchange markets as they brace themselves for another bout of currency turmoil.
Morgan Stanley, in a research report, has included the rand in a new classification of the five "most fragile" global currencies. The others are the currencies of Turkey, Brazil, Indonesia and India. It noted that South Africa was the only one that had not hiked interest rates recently.
At the same time, Morgan Stanley emphasised that the Reserve Bank was well known for its noninterventionist philosophy in terms of exchange rate management. Bank governor Gill Marcus has repeatedly indicated the Bank will not intervene to support the currency.
The Bank has denied market rumours that its new money market liquidity strategy, announced last week, is linked to support for the rand.
The Bank announced the strategy a day before Brazil introduced its own $60bn currency intervention programme. It includes one auction a day of currency swaps and a weekly sale of repurchase contrasts to support the currency. Similar interventions were made by India earlier in the month to stop the fall in the rupee, without much success.
The Bank aims to increase the money market shortage to bring it more in line with the total of commercial banks’ cash reserves, but emphasised it will be phased in over time so as to not disrupt present market activities.
However, some analysts say that creating a bigger liquidity shortfall will put the Bank in a better position to support the rand by buying the currency in times of stress. The bonus will be that it will not involve reserves, an approach similar to that taken by Brazil.
Nomura emerging markets analyst Peter Attard Montalto said on Monday the Bank’s announcement had been overhyped by the market. He said some local players had seen it as either a back-door tightening of liquidity by increasing reserve requirements or through foreign exchange swaps in the market. "But they are underestimating the way the Bank influences markets."
Reserve Bank deputy head of market operations Callie Hugo said there was no link with the Brazilian step. "In our framework, the central bank creates a money-market shortage linked to the cash reserve requirement for banks."
Banks have cash reserves of R65bn deposited at the Reserve Bank, but the money market shortage is about R22bn. "This is obviously too low for the Bank to have a meaningful impact on banks’ cost of funding and short-term interest rates," Mr Hugo said.
He said the Bank would include foreign exchange swaps and reverse repos in its money market operations. This is markedly similar to the Brazilian steps, the difference being the Brazilians are using their own dollar resources, while the Bank is set to involve local banks to increase liquidity.
"This is signalling to the market that the Reserve Bank has some weapons in its armoury, even if it is reluctant to drain foreign exchange reserves or raise the policy rate to support the currency," Atlantic Asset Management portfolio manager Michael Grobler said.