Rand's Meltdown Also Worries U.S., Britain

From Reuters

South Africans may not know it, but when the country awakes today, it is likely to be a poorer place.

Unprecedented aid from the central banks of Britain and the United States failed to stem a collapse in the value of the country's currency on world foreign exchange markets last week.

The rand crashed 8% against the dollar in 24 hours--crushed in a monthlong attack after a worldwide emerging market crisis made it an easy target for currency speculators.

The rand's fate today--and the response of the South African Reserve Bank as well as government allies in London and Washington--is likely to dictate whether desperately needed jobs and growth are delivered or destroyed.

South Africans will not have to wait to see the price of that first round of drinks on their next foreign holiday to feel the pinch. They will know it in higher prices at home and whether they still have a job.

Economists fear the weaker rand will translate into higher inflation--which occurred in 1996 when a 20% fall in the currency doubled price growth in a matter of months--and that higher interest rates will cripple economic growth.

Reports that the Reserve Bank had enlisted the U.S. Federal Reserve and Bank of England to bolster the flagging rand late Friday failed to prevent its headlong slide and the currency touched 5.96 in New York trading, from 5.42 on Thursday morning.

Officials at all three institutions declined to comment on whether they had acted to support the currency. The rand ended at 5.87 against the dollar in New York but will face a severe test today as speculators bet against the resolve of the central bank to pour its hard-won foreign exchange into a seemingly futile fray.

It could also turn again to interest rates--repeating a June 19 decision to force the official repo rate higher.

But this would have disastrous implications for the country's anemic economy.

South Africa's economy grew by only 0.7% in the first quarter and has little prospect of reaching the 3.5% gross domestic product growth forecast by the government for 1998-99 if lending rates do not come down.

The country's retail banks have hiked their prime rates by 2 percentage points to 20.25% since late May, making the cost of borrowing more expensive for consumers and business alike, just when the economy needs spending to foster growth.

The central bank could turn its back on the rand and let the market establish a new, sharply lower level.

This would be a bitter pill to swallow for an institution that clearly feels the currency is being victimized in a wider emerging market crisis. It would also have serious ramifications for the region and beyond.

Economists reckon that Britain and the United States are fearful of the Asian crisis spreading and wanted to make a symbolic gesture to demonstrate that there was no fundamental reason to tar South Africa with the same brush.

"One can understand the concern of the Fed and BOE because we are a fundamentally sound economy founded on real wealth, and there is no good reason for us to go down the tubes," said Ted Osborne, a consultant to Absa Securities.

"They must both be worried at Asian contagion creeping closer to the West," he said.

South Africa has been penalized for slow growth, weak balance of payments, a widening current account deficit and relatively low official foreign reserves--whose size is clearly insufficient to stave off a concerted attack.

Economists doubt that South Africa's flaws, in an otherwise solid and politically stable emerging market, warrant such a savage assault.

South Africa has a sound banking system and cash-rich corporations, which have relatively little debt and are unlikely to be driven under by high interest rates, making any comparison to Indonesia inaccurate.

But the currency changes could dash promises by the governing African National Congress to deliver jobs and ease the poverty of the black majority.

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