South Africa’s reliance on foreign capital inflow
After the end of The Apartheid era and the abolishment of all laws that were associated with the era, the various international sanctions and bands that were put on South Africa were lifted. This allowed numerous countries to begin investing in South Africa. These foreign capital inflows were greatly needed by the South African economy as the new government had the following economic goals: “Attract foreign capital, reduce the large role of government as government owns half the countries fixed capital assets and facilitate gradual restructuring of industry along globally competitive lines” (Germishuis, 1999: 2). The two latter goals could only be achieved through proper financing for the government. During the 1994 era, domestically raised capital could not be used for the financing of local investment initiatives that promote economic growth. As Mohr (2003: 2) states, “Between January 1990 and June 1994, there was a steady net outflow of capital not related to reserves of almost R27 billion, partly as a result of repayments of foreign debt emanating from the 1985 debt standstill arrangement”.
This effectively meant that South Africa had very little funds available for boosting the investment industry which in turn helps with the sustainability of high levels of economic growth. Due to these foreign debt payments by domestic funds, South Africa heavily relies on foreign capital inflows for high levels of investment. Since the government was obviously aware of this situation, various policies and acts were put into action to attract foreign investment. “In 1997, South Africa managed to attract a net capital inflow of $3.58 billion (3.4 percent of GDP), more than seven times the $478 million invested in 1996. The inflow was predominantly long-term private capital, moving into stock and bond markets”(Germishuim, 1999: 1). Though the government was successful in attracting foreign capital inflows, a decrease in the domestic interest rate is eminent when capital inflows are high. “From 1994 to 1999, net capital inflows in South Africa were on a steady rise for 3% of GDP in 1994 to a staggering 6.5% of GDP in 1999” (Mohamed, 2004: 28). Between 2000 and 2002, capital inflows fell to -2% of GDP. This was due to South Africa currency crisis in 2001 that led to high levels of capital flight in the country. After the new millennium, capital inflows in South Africa began to steadily rise and are now ranging between 4 and 7% of GDP.
Exchange rate crisis of 1998
In 1997, East Asia experienced an exchange rate crisis. It is said that these countries were victims of their own success. “Their very success led foreign investors to underestimate their underlying economic weaknesses”(IMF, 1998: 1). Because of large capital inflows that these economies enjoyed, there was increased demand for policies that protect the financial sector and institutions struggled to keep up with the demand.
Since Asia is probably the largest exporter of goods in the world, a financial crisis in that region will evidently cause a ripple effect that will cause a global financial crisis. This Asia crisis added to what South Africa would have experienced the following...