Rand will claw back - Manuel

http://www.thetimes.co.za/Business/BusinessTimes/Article1.aspx?id=870399

Minister believes fear — not reality — is driving volatility, writes Tamlyn Stewart. Minister of Finance Trevor Manuel told Business Times on Friday that the huge swings in exchange rates were “worrisome”.

“I think we’re in serious overshoot territory now,” said Manuel. “It appears to me that there is still the close-out of positions and, as always happens in these circumstances, these foreign exchange markets overshoot. They overshoot very radically and then they claw back,” he said.

Asked how long the recovery would take, Manuel said: “The problem is I can’t answer that question because there are just so many ideas in play at the moment all over the world.”

The rand did regain some ground on Friday to trade at around R10.85 to the US dollar late on Friday evening, after a dismal week that saw the local currency sink to its worst levels since 2002.

Manuel referred to December 2001 when the rand touched R13.89 to the dollar: “Its traverse up out of that trough was probably faster than the route down. I think over the past 15 years you would find those kinds of movements and during the period we’re living through there’s likely to be quite a bit of that.

“Look at the intra-day highs and lows on the Dow. It can’t be rational movements that drive it through a thousand points in a single trading day,” he said.

Markets around the world plunged on Friday as investors sold stocks in a panic over fears of a global recession.

“Fear is the key, and I think that arises from circumstances where hedge funds have operated in a highly leveraged world with highly leveraged capital and they need to close out positions,” Manuel said.

“These oscillations are going to be there because it’s not informed by reality.”

Stanlib portfolio manager Hlelo Giyose said of the rand’s dismal week: “What has happened is that the world associates South Africa with commodity prices, and if commodity prices go down it means South Africa will have a tough time and its growth rate will suffer.

“But mining contributes about 6% to GDP, so to overly punish South Africa because of commodity prices is a thing of panic and short-sightedness.”

The battered rand and the global credit crisis will make it far more difficult for Eskom to raise the R340-billion it needs to finance its infrastructure build.

But Manuel said Eskom was already exploring financing options. “Eskom, for instance, has been talking to the African Development Bank and the World Bank with us. Those discussions have started,” he said.

Despite previous reluctance to source capital from the World Bank, the minister of finance said Eskom was an “exception”.

“I think in many respects what happens with Eskom is an exception — it is a big number; we need to do it.”

However, there are still concerns about the long lead times before World Bank loans become accessible. Manuel said R60-billion from government would buy Eskom time, but discussions had to start now.

“I’d rather have loans approved permitting draw-downs at short notice. ”

He said issues on the table in respect of World Bank loans were: “ Can we deal with the exchange rate risk, and can we borrow at a rate that is competitive with the rate at which we’d be able to borrow in capital markets?

“For many years we had the luxury of choice. That luxury has gone.”

Manuel said the admission by former chairman of the US Federal Reserve Alan Greenspan “that he may have misread the situation, misunderstood what was happening” was significant.

“When Alan Greenspan said in Congress on Thursday that financial markets have to be regulated, the scale of the change is actually quite phenomenal.

“ The next few months is likely to be a huge period of reappraisal of what went wrong, what needs to go right, and what the mechanisms are going to be to resolve some of the issues.

“Part of the message of the present to policymakers is that somehow we need to manage this so these polar extremes don’t arise, because it’s that that makes decision-making difficult.”

He noted that there had been more financial crises in the last 20 years than ever before.

“Many of them have tended to be in the developing world, now this is G7 stuff. (The G7 is the group of wealthy countries.)

“The sense I have about the future is that there’s no decoupling possible; I think countries are going to be locked into a globalised world.”