SA ‘protected against capital flight’, says Gordhan

2011-10-12 11:01

South Africa has sufficient measures in place to protect the economy from capital flight in the event of another global recession, Finance Minister Pravin Gordhan said today.

Replying to a written parliamentary question by Narend Singh of the IFP, he said South Africa’s flexible exchange rate provided a shock-absorbing mechanism for the economy in the event of capital outflows.

A real depreciation of the exchange rate would make exports more competitive and push up the cost of imports, in turn reducing the current account deficit, he said.

“However, our prudently managed fiscal and monetary policies, which aim to keep the country’s debt burden at a sustainable level and control inflation, are essential to support investor confidence and reduce the probability that capital outflows become destabilising,” the minister said.

South Africa had a relatively low external debt burden, which meant that a weaker currency did not materially affect the country’s balance sheet.

“Unlike many other emerging markets, we are fortunate to have a deep and liquid domestic bond market that allows the government and private sector to borrow money in rands,” Gordhan said.

The domestic banking sector was also primarily funded in local markets, which is why the country had not experienced the same acute liquidity squeeze in the last crisis as many banks overseas which depended on dollar or euro funding.

Over the past few years, South Africa’s gross foreign exchange reserves had increased to a level that more than adequately covered its foreign obligations.

South Africa’s gross reserves amounted to $51.5 billion (about R402 billion) in August this year from $34.3 billion (about R267.7 billion) in August 2008, just before the collapse of Lehman Brothers in the United States.

If necessary, some of these reserves could be used to ease temporary market stress in response to global market turmoil.

“Our prudential framework governing the offshore exposure of institutional investors and pension funds are also important safeguards against destabilising capital flight.”

Foreign asset limits were increased by five percentage points in December last year to 25% for retirement funds and 35% for institutional investors.

However, the limits remained well within international benchmarks and consistent with South Africa’s financial stability objectives, Gordhan said.

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