Manuel rounds on critics as markets plunge
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Emerging Markets

Manuel rounds on critics as markets plunge

South Africa’s finance minister Trevor Manuel has rounded on critics of his orthodox economic policies as global markets batter the country’s currency and stock values.

Manuel said that leftist critics of the orthodox economic policies he has followed since 1996 should get off their high horse.

“My constant plea to detractors is: this horse you want to ride – you might want to dismount it, the legs are too high, and you know you can only fall off and kill yourself in the process,” he told Emerging Markets in an interview in Washington.

South Africa relies on foreign portfolio inflows to fund its yawning current account deficit at 9% of GDP this year.

As besieged investors flee risky assets, the rand has plummeted: on Friday it was trading at a six-year low of 9.50 to the dollar before recovering to 9.3750. The stock market has plunged and government bond yields widened dramatically.

Leftist critics have seized on the issue of rand volatility to demand a weak fixed exchange rate, higher government spending, and an end to the central bank’s inflation-targeting regime.

A spokesperson for the Congress of South African Trade Unions said that the free exchange rate “has subjected South Africa to destabilizing inflows and outflows of capital”.

But Manuel argued that the flexible exchange rate regime would provide a shock absorber against capital volatility and external pressures, reducing costly adjustment in domestic wages and nominal prices. “Our focus has been an inflation targeting regime, financial market depth and stable interest rates. My interest is stability in these areas, rather than a focus on exchange rate management.”

Investors fear that next year’s elections, where an administration led by Jacob Zuma – the leader of the African National Congress whose leftist supporters successful ousted president Thabo Mbeki last month – is all but guaranteed, due to the party’s electoral dominance. Manuel briefly resigned in solidarity with Mbeki, triggering abrupt falls in the rand before he was reappointed later that day.

Manuel expressed frustration at the difficulties in communicating the economic benefits of the inflation-targeting regime and free exchange rate to the wider public. “Price stability gives workers and the poor a better chance. It improves their quality of life.”

Nevertheless, he hinted that some economic policies may have to be adapted in the face of political and social changes. “It is important to remind ourselves that policies that are too rigid tend to shear, so you always need a measure of flexibility”, to better “evaluate what you are doing”.

Declining tax revenues, energy infrastructure investment and slowing global growth will weigh on the government finances over the next year.

Manuel, who will deliver the mid-term budget on October 21, explained that given these near-term budgetary challenges, ensuring a fiscal surplus would not be an overriding preoccupation. “I don’t have a fetish for this [a fiscal surplus]. I am more dispassionate and pragmatic.” South Africa is forecast to slow to 3.5% economic growth this year from 5% average growth over the last four years.

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