SA needs tougher exchange controls before junk status hits

Reserve Bank should urgently insulate the rand from further financial chaos by imposing tighter exchange controls.

During this interminable period of economic stagnation, with no prospects of an upturn in sight thanks in part to Donald Trump’s victory, South Africa desperately needs the “radical economic transformation” repeatedly promised by the ANC. Yet, there was nothing radical or transformative in the medium-term budget announced by Finance Minister, Pravin Gordhan last month.

Gordhan’s budget revealed how the foreign credit rating agencies’ threat of a “junk” rating was reaching maximum power just before they follow through with a dreaded downgrade. Under the agencies’ thumb, Gordhan felt compelled to adopt a deficit target for 2018 of just 2.5% (down from 3.9% last year and 3.4% this year).

Yet, within the next month rating agency Standard & Poor’s Konrad Reuss recently hinted, his firm is likely to be first to announce a downgrade, especially if Gordhan faces more unfounded state prosecution.

South Africa is, in any case, already suffering de facto junk bond status, measured by the interest rate paid to international investors on major countries’ state bonds now nearly the highest in the world at 9%. Only Brazil, Venezuela and Turkey are slightly worse.

The South African Reserve Bank could urgently lower local interest rates and insulate the rand from further financial chaos by imposing tighter capital controls. These will ‘delink’ the economy from the most destructive global circuits of capital.

Where the global economic rules are unfair or malicious, the delinking strategy is the only alternative. There’s plenty of evidence that the rules are unfair. For example, denying world pharmaceutical monopolies a patent monopoly on vital medicines has raised life expectancy from 52 to 62 over the past decade thanks to generic, locally-made replacements.

Financial delinking

Financial delinking is most important. Intense capital outflows, which can be triggered, for example, by threats of a downgrade, lead to higher interest rates. This affects local borrowing costs.

Prior to the 2008 crash, the last such major South African episode was in 1997-98 when crises in Thailand, Indonesia, South Korea, Malaysia, Brazil and Russia caused investor flight from rand investments. This forced the South African Reserve Bank governor Chris Stals to raise interest rates by 7% within two weeks, amid a 40% Johannesburg Stock Exchange crash.

For bankers, an even more frightening episode was in August 1985 when short-term foreign debt of $13 billion came due for repayment. The President, PW Botha’s ‘Rubicon Speech’ caused international lenders like Chase Manhattan’s Willard Butcher to cut off new loans. Botha’s response was to temporarily shut the stock market and default on foreign debt repayments. He also imposed capital controls – most famously the financial rand (FinRand) as a parallel currency to the commercial rand – to keep funds from escaping using a monetary penalty.

The FinRand stayed in place until March 1995. South Africa still has prudential regulations in place that limit how much financial institutions can invest overseas. For example, most insurance companies and pension funds must keep 75% of their funds invested in local assets. Such controls prevented far worse damage in 2008 than transpired, it is acknowledged by people as different as Johann Rupert and Jeremy Cronin.

The South African rand is now one of the most volatile major currencies in the world (with the Mexican peso obviously a victim of Trumpism). Gordhan and the South African Reserve Bank should consider tightening capital controls to reduce the currency’s vulnerability. This could include immediately halting outflows to foreign corporations, and rolling back generous (R10 million/year) offshore allowances enjoyed by the richest South Africans.

A mountain of foreign debt

One reason for tougher capital controls is the country’s dangerously high foreign debt. Just before Botha’s 1985 crisis, debt owed to overseas lenders hit 42% of GDP. Today it is around 40%, a modern national record.

With foreign debt of $135 billion and hard currency reserves of less than $50 billion, an emergency loan may be needed from the International Monetary Fund (IMF) or the closely-related BRICS Contingent Reserve Arrangement. This could well mean extreme austerity.

The most important outflows are to foreign shareholders of multinational corporations. Those regularly amount to more than R150 billion per year in licit (legal) profits and dividends, plus an average of R300 billion in illicit financial flows (during the 2004-13 period measured by the Washington NGO Global Financial Integrity). Paying these profit outflows requires yet more foreign borrowing. (In contrast to such payments outflows, South Africa’s trade deficit from January-September 2016 was only $75 million.)

Delinking needs to be on the agenda

Acclaimed Indian political economist Prabhat Patnaik, who delivered the 2016 Wolpe Lecture last month, is an advocate of countries like South Africa ‘delinking’ from the global economy. The objective would be to insulate them from world financial chaos through imposing tighter capital controls.

Prabhat cites the 1933 Yale Review endorsement of capital controls by John Maynard Keynes, often regarded as capitalism’s greatest economist. Financial Times columnist Wolfgang Münchau expressed concern that Keynes’ lessons have been forgotten:

The point is to prevent hot money flowing in during the good times, and to stop it from draining out in the bad times. This is not yet a subject of polite conversation among policymakers.

Diverse countries have successfully re-imposed exchange controls. These include Malaysia (1998), Argentina (2001), Venezuela (2003), Cyprus (2013) and China (2016).

‘Delinking’ alone isn’t enough, Patnaik argues: “It must be accompanied by an expansion of the home market through redistributive policies. Otherwise it could become merely a kind of ‘beggar-my-neighbour’ policy.”

According to a new World Bank study, the top 1% of South Africans increased their share of national income by nearly 10% over the last quarter-century.

But even more urgently, before finance flows out even faster next month, South Africa desperately needs a discussion about capital controls – even in polite company.

The Conversation

Patrick Bond, Professor of Political Economy, University of the Witwatersrand

This article was originally published on The Conversation. Read the original article.

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This is a classic case of trying to close the stable doors after the horse has bolted.

It is claimed that the Guptas, their comrades, and other top government officials have already moved their money out of the country. Just why should those with a little bit of cash left be made to leave their little savings in South Africa where it will have no value in time. Foreign businesses will not invest here if the fiscus is strangled either.

Professor Patrick Bond, where was your voice when the government and their friends were plundering the countries assets? Or was your opinion then as secretive as the money that was claimed to be shifted out? Please enlighten us.

Well said Sweetpea

This constant sugar coating and neglect to cap and cane the real culprits [ ie, thieving govt, colluding big business etc ] is criminal to say the least

And akin to blaming the lone weekend fisherman for the overfishing of the world seas while the industrial fleets plunder wholesale at will

Shame on you Prof Bond, and all you complicit economists !

The main reason i have decided to remain in SA is because our exchange controls are not too harsh. I must say from my point of view a significant tightening will be the one thing that will get me to emigrate immediately.

yes I can see your reasoning – instead of going to a country (like uk, states etc)that have NO exchange controls – you decided to live in a country whose currency has depreciated 90% in 20 years AND has currency controls. how cunning – but I am a bit lost in that reasoning

yes i can imagine you often get lost in reasoning

And for your information Robert if you stayed in ZA and invested here over the last 10 years your investment went up 112% vs 55% for the S & P 500.
This is without inflation and I do belief after inflation for each country we are not poorer except for the problems in this sunny country that CAN be fixed. It might take time and courage to do so.
You live in Aus and spend there. I live in SA and spend here. It is no better financially to have moved.

“Invest in South Africa, trust our currency, trust our system”, parrots the politician to the investor.

But the message of exchange control to the investor is quite the opposite: that our economy, currency and system is weak and cannot be trusted.

No mention of Bitcoin by the professor. Makes one think.

I would argue that there should be no exchange controls. Its my money – why can I not take it with me ?

What you lose on the swings you make up on the roundabouts! Any free market economy knows that. BUT Politicians and Businessmen must do all they can to attract AND RETAIN capital inflows.

BUT – this is not the African way.

the point is that exchange controls are coming anyway – so sooner the better.

News Flash – SA won’t be downgraded to Junk!!!! You heard it here first!!!!!!!!!!

Don’t be ridiculous. Again we have the academic fringe loonie left promoting policies that are essentially theft in another guise.

The interest rate is an important market signal. Let me repeat that:The interest rate is an important MARKET signal.

If interest rates are too low then overpriced bonds are sold and investors wait for better opportunities. This puts a floor on interest rate movements. The interest rate is effectively the price of money at which savers are willing to lend their cash. Of course, if the interest rate is artificially low then savers undertake other investments which may include externalising their capital – which is their right considering whose money it is after all.

What the professor is suggesting is that the regime rob savers of the value of their money by suppressing interest rates and not allowing one to externalise ones liquid assets. This is a disgrace but the ANC is not known for its morality and integrity.

Of course it is never than simple- there’s more (like the infomercial). Foreign investors who buy SA bonds currently demand a certain return commensurate with the risk of doing business in SA. If this was less than the current interest rates then interest rates would fall as body buyers bid prices up. By artificially suppressing interest rates will merely driver foreign investment elsewhere. They don’t have to invest in SA- the world is their oyster.

However, the regime needs the inflows- and how. This brings us to the extraordinary bit. The professor is actually advocating stifling foreign investment (prevent hot money flowing in). I don’t think that he has the perspicacity to correlate the rate of interest with capital inflows. Withholding foreign dividend payments will be the final nail in the coffin. The Rand will be dumped from all corners, the rand will dive and interest rates will rocket…back to the 20% plus of the 1980s. Try see what this does to the marginal productivity of capital: Disaster- no capital investment.

BTW Keynesian theory has been disproved. The global debt monster engulfing the world economy and the existence of stagflation buried JMK and his barbaric relic theories.

The problem is the ANC not exchange controls. It’s all about responsible government. Theft is not the alternative to responsible government. Despite the flowery language you couch it in.


In essence, the same with the increasing taxes they introducing every year.

The reality is, you can tax us till the cows come home, but unless the problem is dealt with at the SOURCE, ie Govt, it doesnt matter how much is collected at the end of the day if all is squandered !!

Really, what part of this simple logic is govt/economists struggling to understand….!!???

This is why it makes sense to invest offshore in S 65 approved UCITS funds and to forget about local feeders where you depend on the goodwill of the government for a USD / ZAR hedge

Anyone with R10 million in cash took it out long time ago and this article merely confirms the wisdom of doing so. Argentine, Malaysia, Venezuela, China, Cyprus. Good grief!!?

Exchange Control is a very blunt political tool that is used when government fails

December is going to be a great month for ZAR and Equities!!! Fill your shopping baskets NOW!!!!!!!!!!!

Oh yeah ?

Plse fill us in Paolo

Another IYI (Intellectual yet idiot) professor who thinks he has the right and/or the superior intellect to tell everyday South Africans how and where they may save their money.

You are firstly arrogant enough to tell SAfricans from your ivory tower that they may not do what they think is best with their own hard earned savings. Secondly you think you’re bright enough to tell us that your central planning economic interventionism will work ‘this time’, even though it has failed for 20+ years. If money can’t go out, it won’t come in in the first place.

“Diverse countries have successfully re-imposed exchange controls. These include Malaysia (1998), Argentina (2001), Venezuela (2003), Cyprus (2013) and China (2016).”

You seem even more out of touch than the average academic/bureaucrat/IYI. Do you know what disaster has befallen Cyprus and Venezuela in recent times? Do you ever leave your echo chamber? Are you aware of how Chinese are still finding ways of taking billions out of the country despite exchange controls?

And you really nailed the no-skin-in-the-game, out-of-touch-elite stereotype with the Keynes quote towards the end.

Thanks moneyweb

Fantastic post ‘Austrian’

One of the first decently honest comments I’ve seen for a while.

So few that see through these economists sugar coated/ misdirected posts, or the spineless media comments from Big Business SA that never challenge the Zuma corruptoment, but say everything is just hunky dory.

I am sure there are not that many people that are even using the current limit of R1m per year that is allowed to be moved out of SA.

Those with more have already moved the money out long ago.

End of comments.



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