Africa

Robin Harding

Data from the Treasury International Capital system have always got a lot of stick. The system is meant to show foreign holdings of US assets broken down by country (and vice versa) but has a big problem with ‘custodial bias’: it struggles to track funds beyond the financial centre where they are held, e.g. the UK, Switzerland, the Channel Islands, various dodgy Caribbean destinations etc.

Recent sanctions on Libya have created a fascinating natural experiment on just how big that ‘custodial bias’ actually is. Does the amount of Libyan assets in the US reported to TIC match up with the amount of Libyan assets frozen in the US? Answer: a resounding ‘No’. 

Say what you will of the dizzying rise of South Africa’s rand, it has certainly helped to restrain inflation by keeping a lid on import prices. Consumer price inflation – which was over 10 per cent in late 2008 – has been running towards the bottom of the Reserve Bank’s target range, 3 to 6 per cent.

But data released this week suggest that inflationary pressures may be starting to build again – and that they could return with a vengeance when the currency weakens. At 6.2 per cent, November’s producer price inflation figure, released on Wednesday, surprised on the upside. So did the previous day’s consumer price inflation number of 3.6 per cent. 

Just two weeks after Zimbabwe’s finance minister revealed that employment costs were absorbing more than 60 per cent of total government revenue, the state-owned Reserve Bank of Zimbabwe has announced plans to cut at least 1,600 workers.

Giving evidence to the parliamentary portfolio committee on finance and the budget, Gideon Gono, central bank governor, said the retrenchment of three-quarters of the bank’s staff would be one of the largest to be carried out in the country by a single institution. 

A strengthening currency and lower-than-expected inflation have prompted the Reserve Bank of South Africa to cut its repo rate to 5.5 per cent, effective November 19. “The domestic growth outlook remains subdued and below-trend growth is expected to persist,” said the Bank.

Consumer price inflation fell to 3.2 per cent in September, lower than expected. Prices are forecast to rise at an average 4.3, 4.3 and 4.8 per cent for 2010, 2011 and 2012. The inflation target is 3 to 6 per cent. On capital flows, the Bank cited difficulties arising from the Fed’s stimulus programme: 

The Reserve Bank of South Africa is to stimulate its “somewhat fragile recovery”, after falling inflation gave the central bank room for manoeuvre. 

One of the big risks for the Chinese authorities in beginning to gently appreciate the currency is that they set up a one-way bet for investors who believe that the renminbi can only get stronger from now on. Large inflows of hot money could make it difficult to conduct monetary policy, officials fear, and might potentially aggravate inflation.

That explains why there has been much more talk since Saturday about volatility in renminbi trading and using a currency basket as a reference. When China abandoned its currency peg in 2005, it said the renminbi would trade against a currency basket of its main trading partners, but in reality it trailed the US dollar and was much less volatile than the 0.5 per cent daily trading bands allowed.

“In one area, the emphasis will be different this time,” says Li Daokui, a central bank advisor who believes the authorities will pay more attention now to the basket in which the euro plays a large role. Economists who have been briefed by the central bank say that there will also be more daily volatility, in order to keep speculators on their toes.

This means that in principle, says Mr Li, that if the euro gets much weaker, the renminbi could fall against the dollar. Richard Yetsenga at HSBC says something similar: 

Simone Baribeau

Since global central banks widely expanded their roles in the financial crisis, their leaders have been warning about the dangers of attacks on their autonomy. Earlier this week, Ben Bernanke, US Federal Reserve chairman, said that undue interference can “impair inflation-fighting credibility” and “worsen the economy’s longer-term prospects”.

And over the past few months central bank leaders warned of attacks in Argentina (where the central bank chief was fired after refusing to transfer foreign exchange reserves to the government), South Korea (where a vice minister attended a monetary policy meeting), Japan (where the central bank faced pressure to increase lending) and Mexico (where some viewed the appointment process of the new Bank of Mexico governor as politicised). 

Simone Baribeau

Reuters has an interesting interview with the Nigerian central bank chief warning that the government should not count on oil prices of more than $60 per barrel. His comments come as the country’s legislature is currently considering cutting its estimated price of oil from $67 to $55 – which would slash some 15 per cent from the country’s budget, even before cutting estimates for output. Worth a read.

Nigerian central bank chief Lamido Sanusi added his weight on Wednesday to discussions on a review of the 2010 budget, questioning current assumptions both for the price of oil and on domestic output levels. 

You might soon be able to invest in roads, railways and power lines in Africa, if there is support for a suggestion from Kenya’s central bank. So-called infrastructure bonds have recently been put forward by the UK and US, but cross-border bonds are rare. Quite how they would be priced is unclear.

From Reuters: 

Alan Beattie

It’s often the fate of the World Bank to be overshadowed at the spring meetings, since its sibling, the IMF, is generally in the thick of a faster-moving story (Greece, currencies, bank taxes, etc).

But in a weekend when the IMF basically avoided discussing all the big questions, the bank actually made some real concrete progress: it secured the $5.1bn capital increase that its president Robert Zoellick has been seeking for the best part of a year. So, like the IMF with its tripled firepower, the bank is having a shot at keeping up with the growth in the global economy.