A South African perspective on global imbalances

Abstract

Financial inflows into South African financial markets have resumed in 2009 and gained momentum in 2010, largely as a result of low interest rates and an oversupply of liquidity in advanced economies. As an emerging-market country with a current-account defi cit, South Africa is to some extent reliant on these inflows to fund its own external imbalance. However, fi nancial infl ows have exerted significant upward pressure on the exchange rate of the rand, with negative effects on the exporting sectors of the economy. Prices of South African bonds and equities have also increased significantly, raising possible concerns about their sustainability and possible sudden reversals. There are, however, also characteristics of the South African economy and financial system that improves its resilience to shocks and the side-effects of global imbalances. To date, South Africa has not implemented direct measures to stem capital controls, for various reasons. Its policy reactions to global imbalances comprised mainly countercyclical monetary and fiscal policy, a further accumulation of foreign exchange reserves to moderate the exchange rate appreciation and further relaxations of controls on capital outflows.