SA urged to introduce controls on capital flows

Addis Ababa – The United Nations has urged South Africa to introduce controls on short-term capital movements in and out of the country, to prevent further large depreciations of the rand.

Adam Elhiraika, director of macroeconomic policy at the UN Economic Commission for Africa (ECA), said on Tuesday that the recent depreciation of the rand to below R16 to the US dollar was not justified on the grounds of the real South African economy.

“It is primarily speculative movement,” he said at a press conference in Addis Ababa, adding that South Africa’s financial sector was too large relative to its real economic sector. And so South Africa needed to do a lot more to manage capital flows.

He said that after the 1997 Asian financial crisis, Malaysia and Chile had successfully gone against the advice of the international financial institutions by introducing measures to control short-term capital movements.

South Africa had not done so then, though the rand had also depreciated markedly, because it was worried about the effect on confidence in the business environment.

But South Africa – and other countries in a similar predicament, like Brazil – now needed to put in place measures to control disruptive short-term capital movements.

Elhiraika was speaking at the launch of the 2016 World Economic Situation Prospects report, produced by the UN’s Department of Economic and Social Affairs (UN DESA), the UN Conference on Trade and Development (UNCTAD) and the five UN regional economic commissions, including the ECA.

The report predicts that global growth will rise moderately to 2.9% in 2016 and 3.2% in 2017, after dipping to 2.4 % in 2015, from 2.6% in 2014.

It said the 2015 slowdown had been worse in developing and transitional economies, largely because of weak aggregate demand, sharp declines in commodity prices and the value of global trade and commensurate increases in volatility and capital flows and exchange rates.

Average global commodity prices had fallen over 20 percent, while the oil price had plunged 70 percent, since July 2014.

Between September 2014 and November 2015, among emerging economies, the Russian rouble fell 44 percent, the Brazilian real 40 percent, the Malaysian ringgit 28 percent, the rand 26 percent, the Turkish lira 25 percent and the Indian rupee 9 percent. However the rand took its steepest plunge since November last year.

Employment growth remained “tepid” last year while global inflation reached 2.6 percent, the report said.

Meanwhile, growth in developed economies would surpass two percent in 2016 for the first time since 2010, contributing more to global growth in 2016 and 2017 than they recently had.

Both cyclical and structural headwinds would continue to impede global growth, including persistent macroeconomic uncertainties and volatility, low commodity prices and declining trade, rising volatility in exchange rates and capital flows, stagnant investment and diminishing productivity growth and a continuing disconnection between finance and real sector economic activities.

In Africa the report predicted GDP growth would accelerate to 4.4 percent in 2016 and 2017, from 3.7 percent in 2015 because of an improving regional business environment and macroeconomic management, increasing public investment especially in infrastructure, a buoyant services sectors and increasing trade and investment ties with emerging economies.

Among Africa’s regions, East Africa would continue to do best, increasing growth from 6.2 percent in 2015 to 6.8 percent in 2016, supported by foreign direct investment, public spending on infrastructure and growing domestic markets.

But political uncertainty and instability in South Sudan and Burundi and terrorist threats in Kenya and Somalia would impact on growth.

West African economies grew an average of 4.4 percent in 2015 and would grow 5.2 percent in 2016. The low oil price and election uncertainty had held back Nigeria’s growth last year. But the report saw better prospects in the region’s largest economy this year, driven by a shift to non-oil sectors.

It said the ebola effects were still evident in Guinea, Liberia and Sierra Leone. Growth in central Africa had slowed to 3.4 percent in 2015, largely because of security concerns in the Central African Republic and decreased oil production in Equatorial Guinea. But growth should accelerate to 4.3 percent in 2016 because of investments in energy and infrastructure, especially in Chad and Cameroon.

In North Africa, growth had accelerated last year to 3.5 percent and would rise to 4.1 percent in 2016, because of improvements in relative political and economic stability, especially in Egypt and Tunisia, and increased oil production in Algeria.

Southern Africa had the weakest sub-regional growth of 2.5 percent in 2015, largely because of weak demand, low prices for key raw material exports and electricity shortages in South Africa.

But regional growth would rise to 3 percent in 2016, helped by strong growth in Angola, reflecting government investment in non-oil economic sectors and faster growth in Mozambique and Zambia, supported by infrastructure projects and foreign direct investment.

Africa as a whole would remain vulnerable to global developments, especially in major trading and financing partners such as China and the euro area, and persistent low commodity prices. Further US interest rate hikes might divert investment flows from emerging markets to developed economies.

This was a particular risk for African countries which had introduced sovereign funds as a financing source.

Further currency depreciations would increase pressure on monetary stability through imported inflation while many African countries faced risks of bad weather and security.

The key challenge for Africa was to move towards higher value-added production to lessen dependence on commodities, including developing regional value chains, especially for textiles and agriculture.