South African Economy

Topics: Macroeconomics, Monetary policy, Foreign exchange market Pages: 6 (1886 words) Published: April 21, 2013
From the days of Apartheid, to the times of today, South Africa has relied on foreign capital inflow for the purpose of sustaining high levels of growth through investment in the various sectors of the country. This great reliance on foreign investment has made South Africa vulnerable to fluctuations in the exchange rate and other global conditions. This essay will discuss the extent to which South Africa is reliant on foreign capital, reasons why this is so and the nature of these inflows. Exchange rate issues will also be discussed, with detail of how South Africa combated these issues in the various years that they arouse. Finally, methods on how South Africa can reduce its vulnerability to such fluctuations will be made apparent.

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...
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