Remarks by Daniel Mminele,
Deputy Governor of the South African Reserve Bank,
at the Managing Capital Flows: Challenges for Developing Economies Conference
Livingstone, Zambia
5 May 2017
Good afternoon, ladies and gentlemen.
Let me start by thanking the International Monetary Fund (IMF) for inviting the South African
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Reserve Bank to be a part of this conference and in these rather spectacular and splendid
surroundings. As many of you will know, the Victoria Falls next to us were declared one of
the seven natural wonders of the world. Luckily, the issues we have been asked to address
today do not leave us at the mercy of nature, but are rather about the choices we need to
make to ensure that we harness the good that comes with international capital flows while
managing the risk of damage that they admittedly may cause under certain circumstances.
1. Introduction
In this session, we have been asked to provide some concrete advice to policymakers in
light of what has been discussed during the course of the day. When I read this, I was
reminded of an old Zambian saying: "One who enters the forest does not listen to the
This speaks to remaining focused on one's particular task
breaking of twigs in the bush."
despite what one may see or hear in the process of the quest. Unfortunately, when it comes
to providing advice on managing capital flows, one tends to hear many twigs breaking. This
is a complicated task. Any piece of advice cannot be based on generalisations or
extrapolations as country-specific factors and features of the financial system, as well as the
time at which measures are considered, are of critical importance.
In my remarks today, rather than dispensing concrete advice on liberalisation and volatility
management, I will restrict myself to making some general observations on capital flow
management, followed by sharing experiences from South Africa. I will leave it to you to
judge which of our experiences could be useful in certain environments and which should
rather be avoided. What will be successful or effective will be highly dependent on country-
specific circumstances, although we should always be cognisant of the potential spillover
effects of our individual and collective actions.
2. Views on the liberalisation of capital flows
It is an undisputed fact that most countries have made impressive progress in the
liberalisation of their capital flows in order to reap the benefits of capital inflows while
remaining mindful of the unintended consequences of these inflows. According to the IMF
publication titled Capital flows: review of experience with the institutional view, published in
December 2016, the average number of easing measures introduced between 2013 and
2016 amounted to 851, with almost 60% representing easing by emerging market
economies. China, Colombia, India, Indonesia, Malaysia, South Africa and Thailand
introduced about 127 easing measures. During the same period, only 233 tightening
measures were introduced, with more than half representing emerging market economies.
In order to rationalise this behaviour, it is perhaps at this point worth recapping some benefits
of capital flows.
Countries with a liberalised capital account tend to be able to tap into foreign savings to
invest in infrastructural projects that contribute to sustainable domestic employment creation
and generate income to service the underlying debt. The other benefit relates to the typically
ensuing technology transfer and financial market development and innovation that assist
countries in increasing the absorption capacity of flows without distorting the
opening a country's capital account also
macroeconomic fundamentals. Needless to say,
increases its vulnerability to the changing conditions in global financial markets.
The most fundamental and intricate rule about the liberalisation of the capital account is that
the process has to be well thought through in terms of timing and sequencing in order to
minimise costs and unintended consequences. The manner in which these controls are
eased should be tailored to a country's specific circumstances and economic objectives.
Careful planning ensures that macroeconomic stability is maintained over time and that the
benefits outweigh the costs.
The IMF has recommended a phased approach to capital flow liberalisation, prioritising the
liberalisation of stable flows such as foreign direct investment, which are closely correlated
with growth, before more volatile and short-term portfolio flows. It further recommends that
the relaxation of controls on capital inflows be prioritised before capital outflows.
"Forethought we may have, undoubtedly, but not
As Napoleon Bonaparte once said:
foresight." Some countries which may have planned the process of capital account
liberalisation and subsequently met some macroeconomic preconditions to liberalisation
(like strong and stable growth, low inflation, and high levels of foreign reserves) might in
retrospect discover that they have liberalised prematurely or too rapidly. While the
liberalisation of the capital account is generally associated with the abolishing of capital flows
measures that confine capital mobility, the reimposition of temporary controls in instances
where the openness was prematurely or too rapidly undertaken or posed a risk to
macroeconomic and/or financial stability may be justified. If a country has liberalised at too
fast a pace than its economy was able to handle, temporary and limited measures may be
effective in providing some stability until macroeconomic adjustments and policies have
created, once again, a more suitable environment that can support the free movement of
capital.
As stated earlier and according to the institutional view of the IMF, it is permissible to
reimpose capital flow measures on a temporary basis when the excessive flows pose a risk
to the macroeconomic and/or financial stability of the country. More so, the Code of
Liberalisation of Capital Movements of the Organisation for Economic Co-operation and
Development (OECD), established in 1961 and currently under review, provides an
established process of international dialogue and cooperation with regard to the
management of capital flows. In addition, the Code serves as the platform for countries
adhering to it to explain their policies on capital controls and raise questions about the
policies of others.
Ideally, one would prefer to avoid a situation where capital flow measures are reimposed.
However, it would be important to accept the burden of explaining rather than putting
financial systems and economies at risk for fear of being accused of having committed policy
mistakes. Ongoing engagement and collaboration to stay abreast of the developments in
the capital liberalisation of other countries, including exchanging views and sharing
experiences at conferences such as this one, is necessary to both avoid the need to possibly
reimpose capital flow measures and be better prepared should the need to reimpose arise.
To further the international debate on understanding and managing capital flows better,
including the macroprudential tools that have a capital flow intent, the G201 re-established
in 2016 the International Financial Architecture Working Group which is in the process of
compiling a report on its work for the G20 Hamburg Summit scheduled for July this year.
3. The case of South Africa
The administration of exchange controls is a function delegated to the South African
Reserve Bank by the Minister of Finance. South Africa has progressively liberalised its
exchange control framework since 1994, removing all restrictions on the capital flows of non-
residents. These initiatives were undertaken with the explicit objective of attracting
investment into South Africa. As a result of this predetermined approach, South Africa has
thus far never found itself having to reimpose capital controls but has instead endeavoured
to minimise the barriers on residents, enabling domestic firms to expand internationally,
particularly into Africa.
In South Africa, the sequencing of liberalising controls by type of flow was generally broad-
based for both inward and outward flows. The country does not have restrictions on inward
capital flows and these inflows have thus far been effective in adequately financing the deficit
on the current account of the balance of payments. The country's reliance on portfolio
inflows makes it difficult to impose measures that may dry up this source of funding.
Regarding outward capital flows, a phased as opposed to a 'big bang' approach was
adopted to ensure that financial stability was maintained. The sequencing started with
current account transactions, followed by removing controls on non-residents capital flow,
direct foreign investments by South African corporates, and finally allowing for the
diversification of the portfolios of institutional investors. This approach was followed also
because of the large amount of domestic savings after years of tightening. Although
prudential limits to regulate the foreign exposure of domestic institutional investors still exist,
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Group of Twenty
they have a built-in stabilising effect, such that as the rand depreciates, the institutions closer
to their limit will breach the threshold and will over time be required to repatriate the funds.
As the only source of knowledge is experience, allow me at this point to share our use of
the policy toolkit for managing capital flows. The policy response to capital flows is
embedded in maintaining macroeconomic policy discipline and strengthening the depth and
regulation of financial markets. The flexible exchange rate continues to act as a shock
absorber, where the currency is allowed to strengthen if it is not deemed overvalued relative
to the fundamentals or to weaken if it is not deemed undervalued. In a nutshell, South Africa
has a relatively hands-off approach to managing capital inflows while monetary policy is not
focused on the exchange rate but rather on the possible inflationary implications of
exchange rate changes. However, during periods of sustained inflows, the authorities
accumulated foreign exchange reserves, without in any way seeking to influence the
exchange rate towards a particular level or range.
During periods of large capital outflows, such as in the final quarter of 2008, the South
African Reserve authorities deemed it inappropriate to impose capital control measures on
outflows, for the following reasons:

According to the 2016 results of the triennial survey conducted by the Bank for
International Settlements, about two thirds of rand trading occurs in offshore markets.
Any domestic capital flow restrictions will therefore have little to no impact on this
trading but could rather lead to an increase in offshore trading.

The risk of the prevailing domestic financial stability being disturbed if the exchange
rate were to depreciate is limited by the fact that both the private sector and
government borrow mainly in the local currency.
 There is no major mismatch between South African banks' foreign assets and
liabilities, which are both moderate relative to the size of their total balance sheets.

The low level of foreign currency-denominated indebtedness protects balance sheets
as it limits the impact of sudden stops on the accessibility of foreign liabilities. Large
corporates also adopt strategies, such as hedging, to manage exchange rate volatility.

South Africa recorded a positive net international investment position in
September 2015, the first time on record (since 1956). The national balance sheet acts
as a stabilising mechanism as a weaker exchange rate increases the value of South
Africa's foreign
assets.
South Africa's view on capital account liberalisation and capital flow management
is aligned
with the institutional view of the IMF. As an enhanced engagement member of the OECD
Advisory Task Force Committee (ATFC) with no voting rights, the country has been fully
engaged in the ongoing review of the OECD Code. Continued cooperation between the IMF
and the OECD remains crucial for addressing any perception that countries might receive
seemingly conflicting signals regarding the appropriateness of capital flow measures, and is
helpful in enhancing the consistency between the IMF's institutional view and OECD
approaches with the G20 Coherent Conclusions for the Management of Capital Flows. This
cooperation is also crucial for ensuring that the approaches by various international
organisations do not give rise to any conflicting policy advice. Participation in the ATFC
affords South Africa an opportunity to learn about the effective use of capital flow measures
from a full description of the experiences of other countries.
The work on capital flow management by the IMF and the OECD is also crucial for the
macroprudential framework and the policy tools that are being developed by the South
African Reserve Bank. The constant updating on the developmental work on capital flow
management, which forms part of the G20 agenda on the reform of the international
monetary system, under the International Financial Architecture Working Group, is crucial
in the construction of a macroprudential framework and policy tools currently under
consideration by the South African Reserve Bank.
In addition to reviewing its capital flow measures framework, South Africa is continuously
pursuing efforts to further modernise its regulatory framework through reforms in its financial
regulatory and supervisory architecture. In 2016, the South African Reserve Bank published,
as part of its financial stability mandate, a proposed macroprudential policy framework for
the South African financial system and its regulated entities. Although this macroprudential
framework is currently silent on capital flow measures that have a macroprudential intent,
of capital flow measures in South Africa's macroprudential framework is an
the inclusion
current research agenda. While
integral part of the South African Reserve Bank's
acknowledging the role of foreign savings in financing domestic demand, it is of utmost
importance to develop a toolkit of macroprudential measures required to deal with credit and
asset price cycles driven by global capital flows. I must, however, stress that the prudent
way of dealing with volatile capital flows is to maintain disciplined macroeconomic and
countercyclical policies during periods of inflows to ensure that the economy is resilient
should outflows occur.
In a broader context, it is important for source countries of capital flows to be cognisant of
the role and effect of their measures on the policies of recipient countries. Improved global
policy coordination will help to mitigate the unintended spillovers from country-specific
policies and will add stability to and improve efficiency in the global financial system.
In summary, South Africa has made remarkable strides in liberalising capital controls since
1994, especially on non-resident investors. Exchange control restrictions on foreign
investment by private individual residents in South Africa have been progressively relaxed
since 1997, such that the current limits are no longer a constraint. It is estimated that by now
less than 3% of individuals are 'somewhat constrained' by the remaining exchange controls.
Limits on outward foreign direct investments for corporates have also been abolished. And
as a step towards prudential regulations, institutional investors are permitted to invest
abroad, subject to a foreign exposure asset limit (currently 25% or 35% depending on the
type of institutional investor).
With every experience there is a lesson to be learnt; the progressive liberalisation of the
exchange controls came at the cost of losing key information on cross-border flows
that is
crucial for macroeconomic policy decisions. It was at this point that the authorities
strengthened the cross-border system for monitoring and reporting. As the process of
applying for approval of foreign exchange was largely eliminated, authorities were also
required to strengthen regulatory, supervisory, inspection and monitoring roles to prevent
the illegal export of capital. The illicit flow of capital is currently a big challenge for most
countries that have liberalised capital control measures, but that is a topic for another day.
4. Conclusion
the IMF's views on the importance of maintaining
In conclusion, I would like to reiterate
sound policies and strong frameworks, including monetary policy and exchange rate
flexibility, as the first line of defence against excessive capital flows. Robust macroprudential
measures as well as capital flow management measures can serve as a supplementary
defence mechanism, where warranted. The macroeconomic environment should encourage
domestic savings and the deepening of financial markets so that capital flows can be
effectively absorbed and channelled towards productive investment.
The work on capital flow management by the IMF and the OECD, which forms part of the
G20 agenda on the reform of the international monetary system, under the International
Financial Architecture Working Group, is crucial in the construction of a macroprudential
framework and policy tools currently under consideration by various countries. Therefore, a
more consistent global approach to capital flow management issues among various
international frameworks and agreements should be facilitated, including addressing data
gaps. We therefore welcome and support the current collaboration between the IMF, the
OECD, the G20 and the Bank for International Settlements in this area.
Thank you.