31448117
-
Upload
monappa-mounesh -
Category
Documents
-
view
96 -
download
0
Transcript of 31448117
``
25 March 200425 March 2004
Capital flows, exchange control regulations and exchange
rate policy: the South African experience
1 Introduction1 Introduction
The relationship between capital flows, exchange control regulations and exchange rate arrangements has long occupied policymakers
This paper reviews the SA experience
Figure 1 The South African financial account Figure 1 The South African financial account
1 Introduction1 Introduction
The relationship between capital flows, exchange control regulations and exchange rate arrangements has long occupied policymakers
This paper reviews the SA experience Presentation proceeds chronologically:
• Evolution of controls prior to 1983• The 1985 debt crisis and the re-
imposition of controls on non-residents• The liberalisation of controls in the post-
1994 period Some issues for the future
2 Evolution of controls prior to 19832 Evolution of controls prior to 1983 The British influence The relationship between controls and
parallel foreign exchange markets
2 Evolution of controls prior to 19832 Evolution of controls prior to 1983 We never thought at the time that we
were instituting a dual exchange rate system. We thought we were simply applying exchange control, blocking funds of non-residents ... there were some suggestions that we should, in fact, institute a formal dual exchange rate system. But we decided against this, partly because the extended exchange control was considered to be a temporary crisis measure (emphasis in the original). De Kock (1979)
2 Evolution of controls prior to 19832 Evolution of controls prior to 1983 The British influence The relationship between controls and
parallel foreign exchange markets Evolution of the parallel exchange rate
system: • the Blocked Rand• the Securities Rand• the Financial Rand
The Financial Rand system 1979-83:The Financial Rand system 1979-83: Located in Johannesburg and London Operated via 2 linked channels:
• the ‘cash’ market• the stock exchanges
Some implications of the system • Implications for the BOP
Implications for the BOP:Implications for the BOP: A non-resident seller of South African assets
had to be matched by a non-resident buyer, with the exchange rate adjusting to clear the market.
Therefore, non-resident disinvestment had no impact on the country’s balance of payments.
However, there could be no net investment via the financial rand either.
To quote Stals (1980) “investments in South Africa by non-residents with financial rand do not benefit the balance of payments. The mechanism only enables non-residents as a group to shift existing investments in South Africa from one application to another”
The Financial Rand system 1979-83:The Financial Rand system 1979-83: Located in Johannesburg and London Operated via 2 linked channels:
• the ‘cash’ market• the stock exchanges
Some implications of the system • Implications for the BOP• Inherent uncertainty regarding duration
Abolished February 1983
Figure 2b The financial rand: 1979-83 and 1985-95 Figure 2b The financial rand: 1979-83 and 1985-95
0
10
20
30
40
50
60
Per
cen
t
Financial rand discount
2 Evolution of controls prior to 19832 Evolution of controls prior to 1983 “… with the wisdom of hindsight it is clear that
in 1982/3 the monetary authorities were too optimistic about the financial strength of the rand and certainly insufficiently sensitive to the international market perceptions of the basic weaknesses of the rand, the high liquidity of the country’s foreign debt, the downside prospects for the country’s foreign terms of trade, the doubts concerning its internal monetary stability as measured by the increase in the domestic money supply, the low level of real interest rates, and the low level of fiscal discipline.” Lombard (1994)
3 The 1985 Debt crisis and the re-imposition of controls on non-residents
3 The 1985 Debt crisis and the re-imposition of controls on non-residents
The 1985 debt crisis: the backdrop• Between the end of 1980 and the end of
1984, South Africa’s total foreign debt increased from R12,6 billion to R48,2 billion (US $16,7 billion to $25,5 billion)
• of this, short-term debt increased from 49,1 per cent to 68,0 per cent
• largest share of this was private sector debt.
Deteriorating economic fundamentals and a political catalyst
3 The 1985 Debt crisis and the re-imposition of controls on non-residents (cont.)
3 The 1985 Debt crisis and the re-imposition of controls on non-residents (cont.)
The deterioration of economic fundamentals• Gold price declined from over US$500
per fine ounce in February 1983 to US$299 per fine ounce in February 1985
• Exchange rate depreciated by 53 per cent against the USD between September 1983 and January 1985 (44 per cent vs NEER)
• Weak world commodity markets, 3 years of drought, excessive money creation in 1983-84
3 The 1985 Debt crisis and the re-imposition of controls on non-residents (cont.)
3 The 1985 Debt crisis and the re-imposition of controls on non-residents (cont.)
The political catalyst• Declaration of State of Emergency 20
July 1985, and subsequent capital outflows
• Rumours banks wouldn’t renew loans• Rubicon speech 15 August 1995• Large-scale outflows until 27 August
when government suspended trading on the JSE and foreign exchanges
• 1 September 1985: emergency package announced including moratorium on debt repayments and re-imposition of the financial rand
Was the financial rand system ‘effective’?
Was the financial rand system ‘effective’?
It depends Very little empirical work done Can perhaps say something about
insulation provided to interest rates and exchange rates but this has to be weighed against the costs of the system
Source: Kahn (2001: 238)
Tests for volatility shifts in nominal exchange rates:
Tests for volatility shifts in nominal exchange rates:
Compared various exchange rates for first unified (1983-85), financial rand (1985-95) and re-unified periods (March 1995 – October 1998)
Conditional variance proxies for exchange rate volatility in each of the three time periods obtained from ARCH-type models
The conditional variance proxies for exchange rate volatility were then compared for the various periods
Sample period
1st unified
Finrand
Sign of change
Mean
ratio test
Variance ratio test
Rand/US$
mean
2,287
0,723
-
3,163**
-
standard deviation
3,322
2,805
-
-
1,403**
Rand/British ?
mean
1,778
0,786
-
2,262**
-
standard deviation
2,757
1,656
-
-
2,772**
Rand/German mark
mean
1,810
0,602
-
3,007**
-
standard deviation
2,971
1,311
-
-
5,136**
Rand/Japanese ¥
mean
2,453
0,734
-
3,342**
-
standard deviation
3,069
1,342
-
-
5,230**
NEER
mean
2,352
0,605
-
3,888**
-
standard deviation
4,923
2,866
-
-
2,951**
Sample period
Finrand 2nd unified
Sign of change
Mean ratio
test
Variance ratio test
Rand/US$
mean 0,723 0,531 - 1,362** -
standard deviation 2,805 1,320 - - 4,516**
Rand/British ,
mean 0,786 0,800 + 1,018 -
standard deviation 1,656 1,495 - - 1,227**
Rand/German mark
mean 0,602 0,823 + 1,367** -
standard deviation 1,311 1,103 - - 1,413**
Rand/Japanese ¥
mean 0,734 1,092 + 1,488** -
standard deviation 1,342 1,244 - - 1,164**
NEER
mean 0,605 0,696 + 1,150** -
standard deviation 2,866 1,879 - - 2,326**
Some further evidenceSome further evidence
The Engle-Kozicki common feature test • No evidence was found of a common volatility
(ARCH) process in the dual foreign exchange rates using the ‘common features’ methodology
Tests for volatility spillovers • Hamao et al (1990) approach used• estimated volatility shock for finrand included as
explanatory variable in the conditional variance equation for comrand, and reverse
• results revealed volatility spillovers from the commercial rand exchange rate to the financial rand, but not in reverse direction
4 The post-1994 liberalisation4 The post-1994 liberalisation
The debate on exchange control liberalisation
The ‘big bang’ approach• controls provide a disincentive to foreign
investment• immediate abolition as a signalling device
The gradualist approach• sequencing of financial liberalisation (McKinnon
1973 and 1979, Edwards 1984)• risks involved in ‘big bang’ approach
Abolition of financial rand March 1995 Further relaxation of controls
4 The post-1994 liberalisation (cont.)4 The post-1994 liberalisation (cont.) Resident institutional investors
• asset swap mechanism introduced July 1995• involved proposals to swap part of existing
portfolios for the foreign assets of foreign investors (incorporating measures to “lock-in” the reciprocal foreign investment)
• some problems, but “… even so they achieved their basic objective of greater diversification without capital flight” Vittas (2003)
• 2003: as an interim step towards prudential regulation, institutional investors allowed to invest on approval up to the foreign asset limits
Resident companies and private individuals
The foreign exchange and tax amnestyThe foreign exchange and tax amnesty Dangers associated with amnesties Motivation: repatriation of capital vs
regularisation of affairs Emigrants ‘blocked’ funds to be released
Some issues for the futureSome issues for the future Volatile capital flows are a fact of life Revival of debate on controls with each
crisis Softening of attitudes towards controls?
• earlier positions may have overstated benefits and not emphasised enough the dangers of liberalisation
• current state of the debate
Some issues for the futureSome issues for the future
Implications for SA • Gradual approach seems to be consistent
with the direction debate has taken• obvious that further liberalisation should
seek to maximise benefits and minimise costs
• How is perhaps less straightforward?• Shift away from managing flows directly
and toward limiting the vulnerability of the economy via prudential regulation is important, but it would seem there are still important policy decisions to take
Figure 2a The financial rand: 1979-83 and 1985-95 Figure 2a The financial rand: 1979-83 and 1985-95
0
100
200
300
400
500
600
SA
cen
ts p
er U
S d
olla
r
Financial rand/US$ Commercial rand/US$