IMF finds no exact cause of rand collapse

WASHINGTON – A comprehensive study by IMF economists was unable to pinpoint the exact cause of the South African rand’s 42 per cent drop in value against the US dollar in the last four months of 2001.

The unexpected fall of the rand between September and December of that year shook public confidence in government fiscal policy and threatened to push up inflation, prompting President Thabo Mbeki to appoint a commission of inquiry. Like the Myburgh Commission report issued in August 2002, IMF economists concluded that no clear answer existed for the rapid depreciation of the rand.Using a complex set of economic models, the IMF paper issued late Thursday cited a vague combination of “financial market developments” as a likely contributor to the rand’s drop.It also raised questions over whether the South Africa Reserve Bank should have intervened in limiting the size of fall.”Essentially, we find that financial market developments are the most likely source of the depreciation, but the exact cause remains unclear,” authors Ashok Bhundia and Jan Gottschalk concluded.”A preliminary examination of relative policy interest rates suggest that monetary policy did not contribute directly to the depreciation, but this still leaves open the question of whether the central bank could have been more active in trying to limit the extent of the depreciation,” the report added.Some policymakers blamed the fall on speculators taking short positions against the rand.The Myburgh commission, appointed by Mbeki, pointed to broad economic factors behind the depreciation, among them a slowdown in the global economy and declines in the current account balance in the last quarter in 2001.Also mentioned as a possible contributor was global risk aversion toward emerging markets such as South Africa following problems in Argentina and neighboring Zimbabwe.The commission however could not explain the speed of the depreciation nor could it find definite evidence of currency speculation.The IMF team said the depreciation most likely originated in South Africa.”It was the rand that lost in value against other currencies and not the US dollar that gained in strength, indicating that the nominal disturbance originated in the South African economy,” it said.One possible source of such a disturbance, the paper suggested, could have come from an easing in the monetary stance of the South African Reserve Bank relative to the United United States, in which case lower interest rates or an acceleration in money supply would have been the main cause of the depreciation.Like the Myburgh Commission report issued in August 2002, IMF economists concluded that no clear answer existed for the rapid depreciation of the rand. Using a complex set of economic models, the IMF paper issued late Thursday cited a vague combination of “financial market developments” as a likely contributor to the rand’s drop. It also raised questions over whether the South Africa Reserve Bank should have intervened in limiting the size of fall. “Essentially, we find that financial market developments are the most likely source of the depreciation, but the exact cause remains unclear,” authors Ashok Bhundia and Jan Gottschalk concluded. “A preliminary examination of relative policy interest rates suggest that monetary policy did not contribute directly to the depreciation, but this still leaves open the question of whether the central bank could have been more active in trying to limit the extent of the depreciation,” the report added. Some policymakers blamed the fall on speculators taking short positions against the rand. The Myburgh commission, appointed by Mbeki, pointed to broad economic factors behind the depreciation, among them a slowdown in the global economy and declines in the current account balance in the last quarter in 2001. Also mentioned as a possible contributor was global risk aversion toward emerging markets such as South Africa following problems in Argentina and neighboring Zimbabwe. The commission however could not explain the speed of the depreciation nor could it find definite evidence of currency speculation. The IMF team said the depreciation most likely originated in South Africa. “It was the rand that lost in value against other currencies and not the US dollar that gained in strength, indicating that the nominal disturbance originated in the South African economy,” it said. One possible source of such a disturbance, the paper suggested, could have come from an easing in the monetary stance of the South African Reserve Bank relative to the United United States, in which case lower interest rates or an acceleration in money supply would have been the main cause of the depreciation.