A sudden stop of capital inflows because of tapering from the United States Federal Reserve is not anticipated in South Africa, said the Reserve Bank.
“Could a sudden stop happen here? We consider it unlikely,” said Reserve Bank Deputy Governor Lesetja Kganyago on Wednesday 27 November.
Speaking at the Merill Lynch 2nd Annual Fixed Income Investor Conference, Kganyago said the country’s most important vulnerabilities were the twin-deficits (fiscal deficit and the current account deficit). It was important that the country improves its export performance.
The country’s current account deficit was at 6.5% of Gross Domestic Product (GDP) in the second quarter. South Africa relies on capital inflows to fund the current account deficit.
The worst case scenario for capital inflows would be a situation where inflows “abruptly cease”.
South Africa was not a fragile country, he said.
“South Africa is equipped to handle a shock like the end of qualitative easing without suffering a sudden stop. Although the current account deficit should prompt depreciation, a flexible currency and rand-denominated debt protect South Africa,” said the deputy governor.
The Reserve Bank’s policy was not to respond to a weakening currency by defending its value, but to target the pass-through to inflation. “As flexible inflation targeters the proper response to a weakening currency isn’t to defend its value, as the priority but rather to target the pass-through from the exchange rate to inflation,” said Kganyago. – SAnews.gov.za