Johannesburg - The International Monetary Fund (IMF) has placed South Africa among a group of countries that are vulnerable to global risk perceptions.
In its World Economic Outlook released yesterday, the IMF classified Argentina, India, Indonesia, Pakistan, Romania, Turkey and Venezuela, along with South Africa, as less resilient to shifts in global capital flows. Countries that are better able to absorb swings in foreign flows include Brazil, Chile, China, Malaysia, Mexico and Russia.
While the IMF does not suggest it, the findings of its research on capital flows imply that South Africa should abolish remaining exchange controls on residents. The IMF noted: “Since the mid-1990s, emerging markets have had to deal with periodic surges in capital inflows followed by abrupt reversals.” And it said those countries that encouraged capital outflows had proved to be the most resilient.
On the face of it, South Africa’s classification in the first group is anomalous because the IMF links greater resilience to a mix of policy measures which South Africa largely implements. They include better prudential regulation and financial supervision, more countercyclical fiscal and monetary policy, greater exchange rate flexibility and a more liberal regime for capital outflows. Except for a measure of exchange control on residents, South Africa should get a good score.
The common feature of vulnerable countries is that the current account deficit rises when capital flows in. South Africa’s current account deficit – the gap between income from goods and services and the import bill – is equal to 6.5 percent of gross domestic product, well above the acceptable benchmark of 3 percent.
When the rand was trading at R6 to the dollar, before the 2008 global crisis, private sector economists advised further relaxation of exchange controls to relieve upward pressure on the rand. The returns on these investments would now be flowing in, supporting the rand, which is trading at more than R10 to the dollar. In other words, a freer flow of domestic capital would stabilise the currency.
Another difference between the two groups of countries is that South Africa’s group relies more on foreign flows while, in the second group, residents step in when foreigners step out.
More resilient countries have a bigger stock of foreign exchange reserves. China, for example, has reserves worth $3 trillion (R30 trillion) while South Africa has only about $45 billion, enough to pay for about 20 weeks of imports.
The World Economic Outlook highlights three countries that have considerably increased their resilience: Chile, the Czech Republic and Malaysia. It notes that these economies are quite different: Chile has a significant resources sector; the Czech Republic has no resources to speak of but does have a large manufacturing sector; and Malaysia has elements of both, with a modest resources sector in addition to significant manufacturing activity.
Each country took a different approach in building its resilience. Among other things, there was much greater government involvement in Malaysia than in the Czech Republic or Chile. “Of additional interest is the fact that these economies were not always resilient. Each of them tried a number of policy mixes over a period of decades, and it is their earlier unsuccessful experiences, as much as their recent resilience, that sheds light on the factors that improve an economy’s resilience.”
The IMF notes the importance of introducing reforms in the right order. In the resilient countries, “reforms to strengthen the domestic financial system typically preceded other policy measures, while steps toward greater openness to capital flows and exchange rate flexibility came toward the end”. - Business Report