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Rickards: Developing markets should step up controls

The controls should be implemented in an environment where the world economy has been heavily manipulated by developed market central banks.

This was according to investment banker and author James Rickards, who was speaking at the fourth annual African Cup of Investment Management, held in Cape Town on Thursday.

Capital controls are measures taken by a country to restrict the flow of money into or out of its economy.

Emerging markets have been pummelled in recent weeks on the back of fears that the US Federal Reserve could begin reining in its extremely loose monetary policy, notably quantitative easing – the billions of dollars in asset purchases, aimed at increasing liquidity and ultimately stimulating the US economy.

Similar ultra-loose monetary policy measures have been adopted by other developed market central banks, in recent years, in the wake of the recession that hit the globe after the financial crisis.

Combined with very low interest rates in developed economies, this has resulted in a tide of "hot money" flowing to emerging markets, leaving them vulnerable to the reversal of these flows.

Rickards, a critic of the policies being pursued by the US Federal Reserve, said now that it appeared the US might raise interest rates so that these trades "have to be unwound very quickly".

Interest rates
If the US had a normalised interest rate structure, these trades would not have made sense in the first place he argued.

"Open capital accounts may be desirable in a world where markets are not heavily manipulated by developed economy central banks," he said

"But you can’t expect emerging markets to be the victims."

An alternative option would be to keep capital accounts open but reserve the right to restrict redemptions in the event of capital flight, similar to the how hedge funds operate, said Rickards.

These restrictions were something to be considered, until such time as developing economy central bankers stopped these measures, he argued.

Financial markets have begun to price in the possibility that the Fed will begin "tapering" quantitative easing as soon as September. This has hurt many emerging country currencies including the rand, which has declined against the dollar by almost 20% this year.

Capital control measures have been widely debated in the past, as detractors believe they inhibit economic activity.

Limits
India imposed tougher limits on the investments that Indian residents and businesses can make offshore earlier this month, sparking fears of broader capital controls. The move was met with negative investor sentiment but Indian leaders have reportedly stressed that these measures will only last until some stability returns to international markets.

South Africa, which has a history of foreign exchange controls, has steadily been liberalising these restrictions under a democratic government.  

Finance Minister Pravin Gordhan has been critical of the efforts by international policy makers to reduce the fall being experienced by emerging markets.

He told the Financial Times this week that there was an "inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment".

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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