Transcript Document
Challenges of the International Monetary
System and Response Options:
A South African Perspective
ADB-CIGI-HKIMR Workshop: The BRICS & Asia,
Currency Internationalization, and International
Monetary Reform
Johan van den Heever
10-11 December 2012
The views expressed are those of the author and do not
necessarily represent those of the South African Reserve Bank
Outline
Introduction
Key shortcomings of the current international monetary
system or IMS
Broader weaknesses of the international financial system
Challenges that result from extraordinary economic policy
settings in major developed economies
South Africa’s experience with exchange rate reform and
currency internationalisation
Challenges posed by membership of regional integration
arrangements and blocks
Views regarding the adjustment measures related to the
IMS that countries are already implementing
Preferences on options for orderly adjustment of the IMS
Conclusion
Key shortcomings of the current international monetary
system
Dominance of a handful of currencies
A major currency in the system is issued by a constituent
monetary union that has not yet stabilised
Currency volatility
Broader weaknesses of the international financial system
Along the lines of the G-20 Action Plan to Implement
Principles for Reform – the need to
strengthen transparency and accountability
enhance sound regulation
promote integrity in financial markets
reinforce international co-operation
reform international financial institutions
Significant progress is being made
Sound frameworks and principles can moderate risk but
should not be expected to eliminate all errors of judgement
and policy
Cost-benefit approach is important; taken too far
compliance may have unintended – stifling - consequences
Challenges that result from extraordinary economic policy
settings in major developed economies
From 2008 fiscal deficits have widened and government indebtedness has
risen strongly
Now strong need for fiscal consolidation: painful, and the timing seems
most unfortunate
Ultra-easy monetary policy (White, 2012):
The policy may not give that much short-run support to economic activity:
Normal monetary policy transmission channels may be partly blocked
Expenditure may not react so much to lower interest rates
Undesirable longer-run effects:
Undermining health of financial institutions, markets
Undermining “independence” of central banks
Encouraging imprudent behaviour by governments
Significant nominal interest rate differentials in favour of developing economies
Capital inflows to developing economies are boosted
Fears of currency overvaluation, unsustainability
Low returns on foreign-exchange reserve holdings
Search for higher-yielding, safe, liquid international assets
South Africa’s experience with exchange rate reform and
currency internationalisation
From isolated apartheid state to normal participation in international
bodies, trade and finance
1970s: extensive reliance on direct controls in the economy
Exchange control and a parallel exchange rate where nonresidents traded in rand assets between themselves
Import controls and high import duties
Various exchange rate regimes, mostly pegged
1979+: Managed floating exchange rate, movement away from direct
controls
Exchange control over non-residents abolished in 1983
1985+: Direct controls reintroduced
Financial sanctions, foreign currency crisis leading to debt standstill
in 1985
Exchange control over non-residents reintroduced following the
debt standstill
Imperative to repay debt, run current-account surplus
Economic growth impaired
South Africa’s experience with exchange rate reform and
currency internationalisation (continued)
1994+: Liberalisation resumed
Standstill debt no longer a big issue – gradually repaid, good yield
for patient investors
Access to offshore credit markets restored
1995: Exchange controls over non-residents again abolished – and
that is still the case
Gradual liberalisation of exchange controls over residents
Authorities stated clearly that it would be a gradual process
In practice it has involved the raising of the limits that restrain how
much foreign currency a South African person or entity can acquire
for current expenditure abroad or to acquire offshore assets
Limits are no longer binding for most individuals
For institutional investors (such as pension funds) the limits are
fairly liberal and are of a prudential nature
The emphasis has moved from “control” to “monitoring” – an
extensive reporting system has been developed to track foreign
currency transactions, assets and liabilities, almost in real time
South Africa’s experience with exchange rate reform and
currency internationalisation (continued)
Official intervention in the market for foreign currency:
Fairly extensive intervention, “leaning against the wind” through
both spot and forward currency transactions up to 1998
1997-98: Southeast Asian crisis induced outflows of foreign
currency from emerging-market economies
Large-scale intervention by the South African authorities did
not help, and the rand depreciated considerably
Subsequently the authorities have refrained from intervention
(but have from time to time entered the market to purchase
foreign exchange, given the need to strengthen the official
reserves)
Currently therefore a clean float and a deep and liquid foreign
exchange market
South Africa’s experience…
Stronger rand=up
Gold price
boom
Financial
rand
abolished
Southeast
Asian
crisis
Lehman
failure and
“flight to
familiarity”
Democratic
election
Financial
sanctions
and debt
standstill
Severe
speculation
against rand
South Africa’s experience with exchange rate reform and
currency internationalisation (concluded)
Currency internationalisation is facilitated by
A strong banking system and well-integrated financial markets
A solid legal system
Transparency and good governance in the corporate sphere
Accounting standards in harmony with international best practice
Solid financial regulation
A sound payment system with features such as real-time gross
settlement and access to Continuous Linked Settlement
Sound, transparent and consistent monetary and financial policies
and economic policy in general
However, developing strong and reputable institutions along the above
lines
comes at a price
may involve sacrificing elements of national sovereignty or local
flavour
Challenges posed by membership of regional integration
arrangements
South Africa is a member of, inter alia,
the Common Monetary Area (CMA), a monetary
union/currency board arrangement with Lesotho, Namibia
and Swaziland
the Southern African Development Community (SADC)
involving 14 countries in Southern Africa
In the case of the CMA the participating economies all had the
same currency before gaining independence
CMA shows strains in difficult times to maintain the currency
peg
Illustrates need for fiscal conservatism, cooperation,
smoothing mechanisms
Challenges posed by membership of regional integration
arrangements (concluded)
In the case of SADC the countries have independent monetary
policies
Inspired by the initial success of the euro area, in the early
2000s a programme was developed to drive to a single
central bank by 2016 and a single SADC currency by 2018
Euro-like convergence criteria
Some reservations have crept in:
The problems in the euro area…
…pointing at the need for fiscal integration alongside
monetary integration
The considerable differences in economic structure
between SADC countries…
…and with it large differences in the terms of trade
Accordingly the programme for monetary integration is being
reviewed
Views regarding the adjustment measures related to the
IMS that countries are already implementing
Rebalancing of the leading currencies in the IMS in favour of the
developing economies
Sensible
In the case of renminbi, underlying size considerations are
favourable
Also more attractive trend growth than the economies of the
traditional reserve currencies, and at times a different
cyclical position
Greater international use comes at a price
International pressure to give global externalities a more
significant weight in conducting economic policy
Transaction flows more difficult to explain, predict
Sometimes counterintuitive and disruptive flows
Large pool of own foreign reserves is helpful for stabilising
confidence and calming sentiment
Preferences on options for orderly adjustment of the IMS
Allow for variable geometry and diversity in the IMS, not onesize-fits-all dispensation for all countries
IMF:
Strengthened role
Expanding the pool of SDR and lending facilities
Multilateral surveillance in addition to individual country
surveillance
Strengthening support mechanisms – bilateral, in regional
economic communities and in other multi-country formations
Swap lines
Pooling of reserves
Preferences on options for orderly adjustment of the IMS
(concluded)
Augmenting the existing set of reserve currencies in three ways
More reserve currencies – currencies achieving the economies of scale
and solidity of reputation that is required
Expanding the range and role of quasi-reserve assets – currencies that
are close substitutes for reserve currencies
Sovereign wealth fund assets as additional source of international
liquidity beyond what central banks have available
As a result, further opportunities for diversification and risk/return
enhancement for reserve managers
Structural, business-cycle, monetary policy and fiscal positions differ
between countries
Wider choice of currencies and assets
A continued voluntary role for precious metals such as gold and platinum in
the IMS
Precious metals: Liquid international reserve assets which are the
holder’s asset but nobody’s liability
Holding them bolsters confidence in difficult times
Inappropriate to move back to setting fixed parities for precious metals –
shifts in underlying supply or demand for the metal could be damaging
Conclusion
Adding to the number of reserve currencies in the world is
desirable, but not easy, requiring the building of
institutions that support confidence in the currency and
facilitate its use in international transactions
The dominance of a handful of currencies may further be
softened through a number of further currencies coming
to the fore as quasi-reserve currencies
Gradualism has worked well for the South African
authorities in liberalising the market for foreign currency
Grand schemes towards monetary union should be
treated cautiously, mindful of –
the usefulness of a national monetary policy and
exchange rate as adjustment mechanisms
the fiscal dimension which has to accompany
monetary integration
Thank you!