Jos Gerson: Chief SA Economist, Merrill Lynch


BROADCAST TRANSCRIPT: As we’ve already been discussing at some length on this programme, there’s been huge volatility in the currency today. It’s been all over the place, close to R17, actually went through R17 to the pound at one stage. Very close to R12 to the dollar, and that’s been over the last 24 hours. Joining us now Merill Lynch’s chief South African economist, Jos Gerson. Jos, is it all as simple as blaming fears over Zimbabwe?

JOS GERSON: I don’t think it’s all Zimbabwe, I think there’s a lot of uncertainty, there seems to be all sorts of trades going on which are very difficult for anyone to monitor, certainly for economists out there to monitor – extremely difficult. But I do think Zimbabwe’s having an influence and perhaps we are factoring in some worst case scenarios there. I must say that whatever the outcome of the election, it’s difficult to see how it’s going to be smoothly resolved.

MONEYWEB: Interesting that you say that there have been trading patterns which are very difficult to monitor – is there any similarity in what has been going on with the currency in the last 24 hours to what was happening in early December?

JOS GERSON: No, I don’t think it’s nearly as bad as early December. I have a chart which is a kind of a curious chart and has caused some controversy. I don’t push it very hard as any kind of profound fundamental link or anything, but if you look at the South African rand against the dollar in the last few months and you plot it against Argentinean bond spreads, it’s a very similar pattern, and I think the only link is that we are looking at the anatomy of two crises of confidence. A crisis of confidence in Argentina because of its solvency, a crisis of confidence in South Africa for other reasons. Partly the lagged [indistinct] effect of exchange control liberalisation, worries about Zimbabwe, worries about long-term growth and FDI, pent-up demand to take money offshore. All that sort of thing. Now when you look at these crises, within a very short time, you get a serious overshoot, a technical overshoot, you then get a comeback for a while and sometimes, for example – I’m thinking of the Russian debt crisis in 1998, you can get a sideways trade in a spread for something like a year before eventually confidence is restored and these parameters come back to normal, and that seems to be the pattern we’re in. A very volatile sideways trend in the rand at the moment. That’s a bit different to December where you really got a serious overshoot in the direction of weakness.

MONEYWEB: Arthur Buchner made the point that on Monday the rand was pretty much at the levels where it is now. What was the strengthening in the middle of the week due to then? It seems very difficult to explain?

JOS GERSON: It’s not due to anything in particular that one can track from a distance, unless you’re privy to some of the big trades. It’s obvious that the market’s relatively thin, there has been a fall in transactions since the market thinned out after September after that directive was given to banks. The futures trades fell by something like a half. Spot trade fell by much less, and you may just get an export order or something of the kind and suddenly this thing can really move.

MONEYWEB: Just before we leave you, Josh, there has been talk today that there may be an interest rate increase when the Reserve Bank’s monetary policy committee meets next week. Is there any way that Tito Mboweni can avoid one with all the negative data we saw coming out last week?

JOS GERSON: No, I don’t think that he can easily avoid an interest rate hike. There are different philosophies of monetary policy but I think the problem is this – apart from the fact that the target is going to be hopelessly missed this year, it’s not actually clear that they’re going to get into the target next year. It may well be that it’s difficult to contain the inflationary expectations that are building on themselves, and so I think whether one agrees with it or not, whatever one’s view is on monetary policy, I think the odds are that there will be an interest rate hike, and the only issue is whether it will be 50 points or 100 points.

MONEYWEB: We’ll wait till next week to see that one. Merill Lynch’s chief South African economist, Jos Gerson.

Posted in Market commentary

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