South Africa should consider measures to limit short-term capital flows in its stock and bond markets that cause swings in the rand’s value, said Richard Koo, chief economist at Nomura Research Institute Ltd.
“If I were South Africa’s monetary authority I would consider setting up some impediment to short-term capital inflows,” Koo said in an interview in Johannesburg today. Short-term funds from foreign investors can be “very dangerous” because “when they pull out in a panic you can spend ten years licking your wounds,” Koo said, following a presentation hosted by Nedbank Group Ltd.
Foreign investors have been net buyers of 81.5 billion rand ($11 billion) of South African assets this year, according to data from the JSE Ltd., helping the rand extend its surge against the dollar since the start of 2009 to almost 28 percent. That’s prompted the ruling African National Congress to say it will discuss introducing a portfolio inflow tax to discourage short-term investment swings at a policy meeting next month.
“There is nothing worse for emerging markets than these western asset managers with huge amounts of money investing in countries they know nothing about just because they heard they can get some yield,” said Koo. A tax that penalizes investors heavily when they withdraw investments after a short time will limit exchange-rate volatility caused by such flows, he said.
The Congress of South African Trade Unions and manufacturers including ArcelorMittal South Africa Ltd. are lobbying for more aggressive action to weaken the rand, which they blame for stalling an economic recovery. Economic growth in South Africa slowed to an annualized 3.2 percent in the second quarter, down from 4.6 percent in the first three months of the year, Statistics South Africa said in a report today.