Signaling currency crises in South Africa - South African Reserve Bank

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SARB Conference 2006Figure 3: Currency crises in South AfricaEMP 1.645 sigma121086420-2-4-6-8-101993/011993/091994/051995/011995/091996/051997/011997/091998/051999/011999/092000/052001/012001/092002/052003/012003/092004/052005/012005/09IndexEMP 3.0 sigma121086420-2-4-6-8-10-121993/011993/091994/051995/011995/091996/051997/011997/091998/051999/011999/092000/052001/012001/092002/052003/012003/092004/052005/012005/09IndexSource: Own calculation based on SARB (2006)Table 1: Annual depreciation of the rand/US$ exchange rate in selected monthsPotential crisis 1996/4 1996/5 1998/5 1998/6 1998/7 1998/8 2001/12monthDepreciation 16.,8% 23,6% 14,0% 19,2% 37,0% 35,0% 51,2%Source: SARB (2006), own calculationsThe stated shortcomings concerning the precision weights for measuring currency crises in thecase of fixed exchange rates can be translated to the South African case. In this case it can becriticized that the more current crises, namely in the period after the decision of the Treasuryand the SARB in 2000 not to intervene in the case of speculative pressure on the rand, maylead to an underestimation of currency crises. This can be expected because these later crises202Knedlik
SARB Conference 2006are supposed to just affect the exchange rate and not the policy instruments of interest ratesand reserves. 12 Thus, if interest rates and reserves used to be relatively stable, their weight inthe EMP may be relatively high. Since interest rates and reserves are not responding toexchange rate developments, their variations may overlay depreciation episodes which wouldhave otherwise been called currency crises. However, interest rates may not be adjusted tocounteract speculative pressure but may be adjusted to avoid rising inflation due to increasingimport prices. Thus, a forward-looking monetary policy-maker may still react in the case of anexpected depreciation of the rand by increasing interest rates. Thus, it seems to be appropriateto calculate two other versions of the EMP, one setting the weight on reserves (γ ) to zero andanother setting the weights of reserves and interest rates ( βγ) , to zero. Figure 4 shows thecase of an EMP only consisting of percent changes in the exchange rate.Figure 4: EMP, βγ= , 0, 1.645 sigma thresholdEMP exchange rate, 1.645 sigma25201510Index50-5-10-15-201993/011993/091994/051995/011995/091996/051997/011997/091998/051999/011999/092000/052001/012001/092002/052003/012003/092004/052005/012005/092006/05Source: Own calculations based on SARB (2006)With this measure seven crisis months are identified which are, however, not in all casesidentical to the above ones. The crisis months similar to the above analysis are April 1996, July1998, December 2001, i.e. all major crises are indicated by this method as well, although thecrisis duration is shorter. Additionally the method indicates crises in May 2000, October 2001,January 2004, and June 2005. It is not surprising that more crises are indicated for the pastcouple of years because of the above-mentioned change in policy. This version of the EMPindex, including the exchange rate, can be employed using different thresholds. The results canbe seen in the annexure. Two crises months are left using the highest threshold of three timessigma plus the mean, which are July 1998 (again) and December 2001. Figure 5 shows thecase where just (γ ), the weight on reserves, is set at zero.12 South Africa saw a change in the exchange rate policy from exchange rate smoothing between the times of SARBgovernors Stals (1999) and the introduction of an inflation targeting regime in 2000 (Mboweni 2000). In 2001Governor Mboweni (2001) noted with regard to exchange rate volatility:” ... we have to live with it – sit tight, grit ourteeth and suffer in silence”.Knedlik 203
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