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Treasury's Lesetja Kganyago Says a South African Inflow Tax Won't Work
South Africa shouldn’t impose a tax on foreign capital inflows to curb the rand’s gains because it depends on that money to finance its current account deficit, National Treasury Director-General Lesetja Kganyago said.
A tax on portfolio inflows may also boost bond yields as investors push to preserve their returns, adding to the government’s borrowing costs, Kganyago said in an interview in Johannesburg today.
The ruling African National Congress proposed in a discussion document on July 30 that an inflow tax should be considered to help curb the rand’s appreciation. Kganyago’s comments are the first from the Treasury to indicate it’s unlikely to consider this option when it announces tax proposals in its Medium-Term Budget Policy Statement on Oct. 27.
“When you are running a current account deficit and you are looking for these inflows to finance your deficit, you seem to be shooting yourself in the foot,” Kganyago said. “I do not see the economics for it.”
South Africa’s 6.5 percent benchmark interest rate compares with rates of between zero and 0.25 percent in the U.S., 0.5 percent in the U.K., 1 percent in countries using the euro and 0.1 percent in Japan. The rate differential makes local assets attractive to carry-trade investors, who borrow in countries with lower rates and invest in markets offering higher returns.
Carry-Trade
The carry-trade has helped to fuel a 30 percent rally in the rand against the dollar since the beginning of 2009, prompting exporters and labor unions to lobby the government to do more to weaken the currency.
Labor unions and exporters, such as ArcelorMittal South Africa Ltd., the continent’s biggest steelmaker, have joined forces to lobby the government to take more action to weaken the rand and save jobs. The unemployment rate of 25.3 percent is the highest of 62 countries tracked by Bloomberg.
South Africa relies on foreign portfolio investment to finance its import requirements. The current account deficit, the broadest measure of trade in goods and services, widened to 4.6 percent of gross domestic product in the first quarter from 2.9 percent in the previous month, the central bank said on June 24.
“If you’re running a current account deficit, a tax on portfolio inflows isn’t the greatest idea,” Arthur Kamp, an economist at Sanlam Investment Management in Cape Town, said in a telephone interview. “As South Africa continues to grow, we have to continue attracting those inflows.”
‘Best Mechanism’
The rand was at 7.2676 against the dollar as of 4:01 p.m. in Johannesburg, from 7.2772 before Kganyago began speaking and compared with 7.2216 late yesterday.
The Treasury is looking for the “best mechanism” to deal with rising foreign capital inflows that are fuelled by carry- trade investors, Ismail Momoniat, the deputy director general of the National Treasury, said at a banking conference in Johannesburg today.
Interest rates are likely to remain low in advanced countries for at least the next year, and “as long as we have that, emerging market economies, such as China, India and South Africa, are going to face the problem of more capital flows,” he said. “The best mechanism to deal with it is something we’re obviously looking at.”
The Treasury is “following the debate” that’s taking place globally on whether governments should impose a tax on capital inflows to curb currency volatility, Momoniat said.
“One doesn’t assume that imposing a tax, that makes it necessarily effective,” Momoniat said. “Taxes are a blunt tool.”
To contact the reporter on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net
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