South African Economy

From the days of Apartheid, to the whiles of today, atomic number 16 Africa has relied on strange great inflow for the purpose of sustaining naughty levels of growth through enthronisation in the various sectors of the coarse. This great reliance on irrelevant enthronement has made federation Africa vulnerable to fluctuations in the re-sentencing rate and another(prenominal) global conditions. This essay depart discuss the extent to which southerly Africa is dependent on foreign outstanding, reasons why this is so and the nature of these inflows. swop rate issues forget also be discussed, with detail of how southerly Africa combated these issues in the various days that they arouse. Fin altogethery, methods on how South Africa can wince its vulnerability to such fluctuations leave alone be made appargonnt. South Africas reliance on foreign capital inflow later on 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 arrest investing in South Africa.These foreign capital inflows were greatly essential by the South African economy as the cutting organisation had the avocation frugal goals Attract foreign capital, bring low the large agency of government as government owns half the countries fixed capital assets and enhance gradual restructuring of attention along globally competitive lines (Germishuis, 1999 2). The two latter(prenominal) goals could only be achieved through proper financing for the government. During the 1994 era, domestically ontogenesis capital could not be use for the financing of local enthronement initiatives that promote economic growth.As Mohr (2003 2) states, among January 1990 and June 1994, in that respect was a steady wage outflow of capital not related to obliges of almost R27 one thousand thousand, partially as a result of repaym ents of foreign debt emanating from the 1985 debt standstill arrangement. This in effect meant that South Africa had very little funds available for boosting the investment industry which in stave 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 get foreign investment. In 1997, South Africa managed to attract a net capital inflow of $3. 58 billion (3. 4 percent of gross domestic product), more than septette times the $478 million invested in 1996. The inflow was predominantly long- experimental condition clandestine capital, moving into stock and bond markets(Germishuim, 1999 1). Though the government was made in attracting foreign capital inflows, a decrease in the domestic touch 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 take 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 amongst 4 and 7% of GDP. Exchange rate crisis of 1998 In 1997, East Asia see an commute rate crisis. It is said that these countries were victims of their own success. Their very success lead foreign investors to underestimate their underlying economic weaknesses(IMF, 1998 1). Be incur of large capital inflows that these economies enjoyed, in that location was increased demand for policies that protect the pecuniary 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 go forth evidently cause a ripple effect that entrust cause a global financial crisis. This Asia crisis added to what South Africa would have experienced the following year.In 1998, the South African currency dwelled into great dispraise. Causes of this crisis include * Commodity prices * After the Asian financial crisis, the global demand for commodities had weakened, putting downward mash on market prices of SA commodities. This meant a flight to safer havens such as fall in States commodities occurred. * Foreign Exchange Market interposition * In 1998 and 1996 as well, the South African keep Bank had heavily intervened in the foreign exchange market. These ventures resulted in net losses of $10 billion (8% GDP) and $14 billion (10% GDP) respectively.The capital for these ventures was acquired in the preliminary market, thus compromising SARBs earn Open Forward position. * Mboweni Bump * 1998 saw the end term for the regulator of the Reserve Bank. The potential that Tito Mboweni might have left the position created suspect for South Africa and the Rand. (Saayman, 20071) To try and counter this currency depreciation, the Reserve Bank believed that this depreciation was a temporary reaction to rumours of divisions deep down the government so they interchange off massive amount of its foreign reserves (Diamond, Manning, Vasquez and W touchaker, 2003 2).The Asia crisis, coupled by SAs own currency issues led the exchange rate crisis. The authorities reacted by intervention in reserves and then through cosmetic surgery of interest judge to stimulate growth. The policies implemented in 1998 did not elaborate the crisis but merely slowed down the process and created a false image. Yes the country did benefit through an increase in investment due to higher(prenominal) interest rates but paid the cost when the country was hit by another exchange rate crisis in 2001.The economy had to claim with the costs of increased de bt, decreased capital inflows, which retards growth in the country. Exchange rate crisis of 2001 The Rand depreciated by 26% in nominal terms against the dollar bill in 2001 between September and December. It is suggested that, there was an acceleration in currency growth in the summer of 2001, suggesting that the depreciation may have been a case of exchange rate overshooting (Bhundia and Ricci, 2004 1). Though this was the case, the South African Reserve Bank did not intervene or raise interest rates this time around (as was the case in 1998).Bhundia and Ricci (2004 7-11) identify the following as probable cause of the 2001 financial crisis * Delays in privatising Telkom * The SA government had announce that the privatisation of Telkom will happen in 2001 but this did not happen due to alter global stock markets. This had a negative effect as it created uncertainty within the financial market of SAs commitment to economic reform. * South African Reserve Banks Net open forward hold back * The SARBs forward book contained large short term liabilities.These low reserve adequacies have been found to increase the probability of exchange rate pressure (Bhundia and Ricci ,2004 7). The forward book received from the Apartheid government was rather large and despite repayments made, the book remained huge. * Tightening of live capital controls * The South African Reserve Bank announced on the 14th October 2001 that there would be a tightening of exchange rate controls. It was argued that, this announcement reduced market liquidity and thereby contributed to the sharp rand depreciation (Bhundia and Ricci, 2004 8).Though market data cannot confirm this for sure, these actions and the time they were taken have an effect on the crisis of the time In 2001, the SA government and SARB decided to act differently than it did in 1998. The increase in interest rates of 1998 had limited effects on bring down depreciation and was seen to be costly for growth and investm ent. South Africa was less in all probability to be affected by fluctuations in the exchange rate as it did not hold large foreign currency.The South African government decided not to intervene in interest rate percentages and reserve ratios. The South African government have admitted that the 1998 intervention insurance was inappropriate. When 2001 arrived, the intervention policy of 1998 was not used and that showed to be a very successful strategy as the macroeconomic reactions of the crisis were very few and over the near few years, the rand strengthened(Bhundia and Ricci , 2004 17). There was a large improvement in macroeconomic framework (policy), which made policy credibility stronger.The forward book that was utilised in 1998 was also abolished. Also, the adoption of an inflation- targeting framework successfully provided a more credible nominal anchor for exchange rate expectations (Bhundia and Ricci, 2004 18). So effectively, the policy reactions of 2001 were more succes sful. Reduction of SAs vulnerability to external surprise SA is the economic powerhouse in Africa and hence needs measures that help reduce the effects of external shocks such as global financial crises.For this drop-off to occur, certain conditions such as, peace and security, quality institutions, infrastructure and support for the hole-and-corner(a) sector must be in place (UNECA, 2010 11). With the above in place, South Africa should try and implement the following * Provide sufficient policy space, so that policymakers can handle the shocks that are externally generated. * Improve the militarization of domestic resources and encourage regional integration * Strengthen neighbouring country dealings and cooperation * Increase private capital inflows Open new and improve existing markets * Heighten social safety nets that will minimise shocks effect on the poor * Investment in labour-intensive employment-focused usual investment programmes that promote private sector growth. * Decrease the amount of debt owed The above mentioned points need to be encoded into policies that can be properly implemented by the government of South Africa and the South African Reserve Bank so as to reduce the vulnerability that SA has when it comes to external shocks. This objective has been achieved by South African economic policies.Monetary policies have been used to contain inflationary pressures and financial policies for the strengthening of public finance that will allow exchange rates that are competitive. In the February of 2000, an inflation targeting strategy was adopted that helped to regulate monetary growth within the economy. These policies have encouraged international competitiveness and assisted in the decline of the current account deficit of 1999 (0. 4% of GDP), to 0. 3% of GDP in 2000 (IMF, 2001 1). In 2006, real Gross domestic product grew by 5% and continued to grow into early 2007.During the start of the new millennium, the SARB publically announced that it would have a foreign market intervention policy that was used solely for boosting reserves. This new approach was successful because by 2007 May, gross reserves had reached $27,9 billion (IMF, 2007 1). This shows that South Africa has been successful economic policies in place policies that will combat external shock. A United Nations report places South Africa as one of the six oil importing nations that withstood the effects of the global financial crisis of 2008-2009.This was done through implementation of stimulus packages and affective countercyclical fiscal and monetary policies that encouraged expenditure on services and infrastructure (UNECA, 2010, 8). Conclusion The new South African government had to take the mess of the past and turn it into the message of the future. A message that says that anything is possible all that is needed are the correct tools, used in the correct scenarios. With the various monetary and fiscal policies put into play in South Africa, I have no doubt that we are ready for the next global financial crisis.