Mariam Isa
2 June 2009
Johannesburg — RESERVE Bank governor Tito Mboweni took the unusual step of intervening personally yesterday to halt a sustained rand rally, warning its strength might be "unwelcome" for SA's shrinking economy.
There was no "preferred level" for the rand, but "many might argue that its elevated levels were unwelcome ... if for example we look at the impact on manufacturing", he told Bloomberg.
Mboweni made the remarks when he telephoned Bloomberg after calling Reuters.
A survey yesterday showed that factory output fell less steeply in SA last month, sparking hope that a severe and prolonged contraction in the economy's second-biggest sector might be easing.
A strong rand could derail a recovery in local factory exports, when the global economy eventually starts to recover.
Citigroup economist Jean-Francois Mercier said: "It may be the speed of the rand's move rather than the level which has concerned the Bank. If you want exports to help growth in your economy, this kind of rand strength is not sustainable in the longer term."
Mboweni's remarks helped to slow the latest spurt in the rand, which scaled a nine-month peak at R7,86/ yesterday, but renewed risk appetite boosted other commodity linked currencies, such as Australia's and New Zealand's.
"The market kind of disregarded his comments. But they will keep the rand from outperforming its peers," a London-based trader said.
Mboweni's bid to influence the currency was surprising, as both the Bank and the Treasury have said for years the rand's levels would be set by global markets, over which they have no control.
But his remarks were seen as a bid to halt the rand's gain of 15% against a trade-weighted basket of currencies in the year so far.
Mboweni conceded that the firmer currency would help curb inflation. He highlighted the risk it posed to the economy, in its first recession in 17 years with record falls in factory production, which makes up 15% of overall output.
SA's purchasing managers' index (PMI), a reliable health gauge for manufacturing, rose to 37,3 last month from 35,6 in April, its new sponsors, Kagiso Securities, said.
A reading of below 50 points to a contraction, but most components of the seasonally adjusted index improved significantly last month, with business expectations rising above the neutral level for the first time in eight months.
"Any recovery will be slow and protracted, but there has been a turn up and it's looking better," said Andre Coetzee, head of fixed income and currency futures at Kagiso Securities, which has taken over funding the survey from Investec Asset Management. The improvement was in step with PMI surveys in Europe and Britain, which yesterday showed contraction in manufacturing output slowing. In China, the PMI was 53,1, a bit lower than in April but above 50 for the third month running. Commodities stocks were boosted by the data.
SA's PMI has contracted since May last year. Last month's survey showed business activity rose to 35,1 from 32,8 in April, while new sales orders rose to 35,7 from 33,7.
The price component fell below 50 for the first time in more than four years, showing input prices are falling -- which could lead to lower consumer inflation.
"This is a welcome relief on the input cost side for purchasing managers, and will hopefully ease consumer price inflation pressures down the line," Coetzee said.
He added that purchasing managers were more upbeat about future prospects.
"A majority of purchasing managers now expect business conditions to improve in six months' time."
Expected business conditions improved from 48.3 to 51.3 points last month.
But the employment index was little changed at 36,9, pointing to more job losses in the sector, said Ben Smit, director of the Bureau for Economic Research, which conducts the monthly survey.
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