South Africa is likely to follow Poland’s lead in buying foreign currency to weaken its exchange rate, Bloomberg reports.

"The Reserve Bank faces calls to weaken the rand from exporters and labor groups who say the currency’s strength is stalling a recovery from the country’s first recession in 17 years. The number of South Africans claiming unemployment benefits surged an annual 71 percent in the year through February as factories and mines cut jobs, Labor Minister Membathisi Mdladlana said yesterday."

South Africa’s government will help the central bank to build up foreign currency reserves to promote a “stable and competitive rand,” Finance Minister Pravin Gordhan said to Bloomberg.

Policy makers are also considering lowering the benchmark interest rate further to deter “speculative” capital inflows that have fueled the appreciation of the ran.

The National Bank of Poland bought foreign currency to lower the zloty for the first time since 1998 last week: the central bank governor died in a mysterious plane crash two days later.

Poland’s central bank intervention on April 9th  triggered the biggest decline in the zloty in two months on April 9. The central bank probably bought between 50 million euros ($67 million) and 70 million euros, said Robert Narkowicz, a trader at PKO Bank Polski in Warsaw.

The zloty gained 0.2 percent to 3.8681 per euro in Warsaw. A zloty rate of about 3.80 per euro “is okay” but a level of between 4 and 4.20 to the euro would enable faster economic growth without negatively affecting inflation, BNP’s Pawlowski said.

The Financial Times published an article by the governor posthumously in which he indicated he planned to intervene again to keep zloty competitive

Polish national bank was in locked in a row with the pro euro Tusk government over building up central bank reserves to enable currency interventions.

The South African central banker clearly has nerves of steel.

Bloomberg

South Africa May Follow Poland in Weakening Currency (Update2)

April 14, 2010, 7:17 AM EDT

More From Businessweek

By Garth Theunissen

April 14 (Bloomberg) -- South Africa is likely to follow Poland’s lead in buying foreign currency to weaken its exchange rate as the rand’s 29 percent rally against the dollar since 2008 hampers the economy’s recovery, BNP Paribas SA said.

The rand has surged the most among 10 currencies in Europe, the Middle East and Africa, returning more than six times the Polish zloty’s 4.2 percent advance since 2008. The gains are pushing the rand toward a key level of 7 per dollar, which it last breached in January 2008.

“We are very, very close to the point at which the South African Reserve Bank will begin to intervene in the market to limit the strength of the rand,” Bartosz Pawlowski, an emerging-markets strategist at BNP, said in an interview in Johannesburg. “If it gets to about 7 to the dollar we think they’ll start to intervene more aggressively.”

The National Bank of Poland bought foreign currency to lower the zloty for the first time since 1998 last week and said it may do so again. While South African Finance Minister Pravin Gordhan and central bank Governor Gill Marcus have said they’re concerned by the rand’s strength, the country’s net reserves were unchanged last month, suggesting the central bank hasn’t boosted foreign currency purchases.

The Reserve Bank faces calls to weaken the rand from exporters and labor groups who say the currency’s strength is stalling a recovery from the country’s first recession in 17 years. The number of South Africans claiming unemployment benefits surged an annual 71 percent in the year through February as factories and mines cut jobs, Labor Minister Membathisi Mdladlana said yesterday.

“There are concerns throughout the world about financial flows and the appreciation of currencies, particularly in the developing part of the world,” Finance Minister Pravin Gordhan told reporters in Cape Town today. “We will give support to the Reserve Bank, and they’ve said it as well, to accumulate reserves as and when we can. We have given them some money and as we can manage the financial resources on our side, we will give them more.”

Carry Trade

As well as buying foreign currency, policy makers should consider lowering the benchmark interest rate further to deter “speculative” capital inflows that have fueled rand gains, Pawlowski said. The central bank unexpectedly cut South Africa’s main rate by 50 basis points on March 25 to 6.5 percent, the lowest in at least 12 years. Even so, the rand remains an attractive purchase for so-called carry trades given benchmark deposit returns of 0.1 percent in Japan and 0.25 percent in the U.S., Pawlowski said.

The rand gained 0.2 percent to 7.2891 per dollar by 12:30 p.m. local time. A depreciation to 8 or 8.50 per dollar would be “preferable for the economy without damaging the inflation outlook,” according to Pawlowski.

Poland’s intervention triggered the biggest decline in the zloty in two months on April 9. The central bank probably bought between 50 million euros ($67 million) and 70 million euros, said Robert Narkowicz, a trader at PKO Bank Polski in Warsaw.

The zloty gained 0.2 percent to 3.8681 per euro in Warsaw. A zloty rate of about 3.80 per euro “is okay” but a level of between 4 and 4.20 to the euro would enable faster economic growth without negatively affecting inflation, BNP’s Pawlowski said.

--With assistance from Mike Cohen in Cape Town. Editors: Ana Monteiro, Gavin Serkin.

To contact the reporter on this story: Garth Theunissen in Johannesburg

 

Bloomberg

South Africa Will Help Central Bank Build Reserves (Update1)

April 14, 2010, 7:39 AM EDT

 

By Mike Cohen and Nasreen Seria

April 14 (Bloomberg) -- South Africa’s government will help the central bank to build up foreign currency reserves to promote a “stable and competitive rand,” Finance Minister Pravin Gordhan said.

“We will give support to the Reserve Bank, and they’ve said it as well, to accumulate reserves as and when we can,” Gordhan told reporters in Cape Town today.

South Africa’s gross gold and foreign currency reserves have declined in three of the past four months, even as Gordhan and Reserve Bank Governor Gill Marcus raised concern about the rand’s strength. Reserves had doubled in the previous four years as the central bank bought dollars, limiting an appreciation in the rand.

With the budget deficit forecast to reach 6.2 percent of gross domestic product this year, the state may have little room to provide funds to the central bank to build foreign reserves.

“We have given them some money and as we can manage the financial resources on our side, we will give them more,” Gordhan said. “We will monitor this very actively and review our stance as the times dictate.”

The rand has gained 1.2 percent against the dollar this year after strengthening 28 percent last year. The currency was trading as high as 7.2575 versus the dollar today.

‘Stable and Competitive’

“We want a stable and competitive rand,” Gordhan said. “The factors that are at play at the moment are ones that are not under our immediate control. There are concerns throughout the world about financial flows and the appreciation of currencies, particularly in the developing part of the world.”

Gordhan said it’s unclear whether a $3.75 billion loan from the World Bank to Eskom Holdings Ltd., the state-owned power utility, may be contributing to the rand’s strength.

The minister said he’s also trying to clarify the role of Chancellor House, the investment arm of the ruling African National Congress, in Hitachi Power SA, a supplier to Eskom. Opposition parties have criticized the ANC, which they say will benefit from Chancellor House’s 25 percent stake in Hitachi. Eskom awarded contracts to Hitachi to supply boilers for its new Medupi power plant.

“The ANC is a responsible organization and it has a long history of ethical standards,” Gordhan said. Chancellor House “is an independent entity of the ANC. Its shareholders must do the right thing and ensure if there is any conflict of interest they must deal with it.”

--Editors: Philip Sanders, Karl Maier

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Nasreen Seria in Johannesburg at nseria@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

gtheunissen@bloomberg.net

 

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