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".

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

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.

Related stories

Smart investing to beat longevity risk

Investors come to a balanced fund because they want growth

New banks circle small businesses

TymeBank, Bank Zero and Capitec are all looking for ways to woo businesses – including SMMEs – on to their books

Debt Act not a relief for everyone

The financial sector has been accused of being hysterical about amendments to the law. But there are some genuine concerns

NHI: the good, the bad, the ugly

Some analysts say the proposed fund is creating policy uncertainty but others think it could help to fix a broken system

State champs at its border Bill bit

The border management authority threatens “to be an auxiliary police service”, creating “oversecuritised zones”

Vocabulary needed to make sense of the new normal

Negative rates are seriously spooking markets. Money managers are used to getting a positive return on their investments
Advertising

Subscribers only

Dozens of birds and bats perish in extreme heat in...

In a single day, temperatures in northern KwaZulu-Natal climbed to a lethal 45°C, causing a mass die-off of birds and bats

Q&A Sessions: Frank Chikane on the rainbow where colours never...

Reverend Frank Chikane has just completed six years as the chairperson of the Kagiso Trust. He speaks about corruption, his children’s views and how churches can be mobilised

More top stories

Eusebius McKaiser: Mpofu, Gordhan caught in the crosshairs

The lawyer failed to make his Indian racist argument and the politician refused to admit he had no direct evidence

Corruption forces health shake-up in Gauteng

Dr Thembi Mokgethi appointed as new health MEC as premier seeks to stop Covid-19 malfeasance

Public-private partnerships are key for Africa’s cocoa farmers

Value chain efficiency and partnerships can sustain the livelihoods of farmers of this historically underpriced crop

Battery acid, cassava sticks and clothes hangers: We must end...

COMMENT: The US’s global gag rule blocks funding to any foreign NGOS that perform abortions, except in very limited cases. The Biden-Harris administration must rescind it
Advertising

press releases

Loading latest Press Releases…