Financialization and liberalization: South Africa’s new forms of external vulnerability

Abstract

Since the late 1990s, shifts in the nature of the global financial integration of developing and emerging countries have exposed them to new forms of external vulnerability. This article explores such in the South African case. The article shows a precipitous growth in the magnitude of South African assets held and traded by international investorsincreasingly institutional investors and 'other' financial institutions, such as hedge funds and complex investment vehicles. The composition of these assets, and the motivation for trading, has also altered, shifting towards a complex set of rand-denominated, short-term assets in equity, bond and derivative markets traded for capital gains. Given this, the article contends that it is the portfolio considerations of such investors, rather than economic 'fundamentals', that have come to determine key economic prices, including the exchange rate, causing volatility, large swings and sudden adjustments. This, it is argued, places monetary policy in a predicament. In the context of liberalised capital accounts, together with the prioritisation of inflation targeting, open-market interventions are ineffective at managing exchange rate movements and volatility, and often reinforce both the patterns of trading and subsequent vulnerabilities while carrying their own costs. In these respects, the nature of South Africa's global financial integrations has exposed it to new forms of external vulnerability, with both these developments, and associated monetary policies, deepening the financialisation of the South African economy.

Cash Transfers, International Finance and Neoliberal Debt Relations: The Case of Post‐apartheid South Africa

“…Reserve accumulation is the strategy monetary authorities have adopted in response to the massive increase in foreign investment of rand‐denominated assets by global traders. The stockpiling of foreign reserves, along with the attendant risks and developmental opportunity costs discussed in the previous section, served to reassure international investors that sufficient liquidity exists to ensure rand–dollar convertibility and quick exit, thereby reinforcing the post‐apartheid pattern of portfolio capital inflows (Isaacs and Kaltenbrunner, 2018: 454).…”

“…Overall, this development has led to a steady rise in South Africa's foreign liabilities. In fact, the latter reached a high of 137 per cent of GDP by 2015, adding to the financial vulnerabilities linked to sudden capital outflows and economic liberalization (Isaacs and Kaltenbrunner, 2018: 443).…”

Profitability without Investment

“…By the early 1990s, South Africa already had a relatively well-developed and influential financial sector, characterized by a strong banking system and sophisticated capital markets (Isaacs and Kaltenbrunner, 2018). By the early 2000s, the country's first democratic government had made a formal commitment to a conventional macroeconomic policy framework targeted at low inflation and debt.…”

“…Following the post-apartheid government's commitment to liberalization, exchange controls were gradually eliminated, a number of large corporates were allowed to list on foreign stock exchanges (notionally to raise capital for domestic investment), capital markets deepened substantially, and South African banks internationalized their operations and investments. Non-resident market capitalization as a percentage of total market capitalization has increased substantially since the early 2000s, both in equity, driven by robust liquidity and profitability, and debt, reflecting a sizeable carry trade attracted by high bond yields related to persistent current account deficits, and significant levels of offshore trading of rand-denominated assets (Isaacs and Kaltenbrunner, 2018). This trend has been accompanied by an increase in market-based credit relative to bank-based credit.5 These developments are in line with a general trend across low and middle-income countries, which has ignited growing concern about new vulnerabilities and the phenomenon of subordinate financialization in these economies.…”

Financialization as a New Regime of Accumulation: Business, Apartheid, and the Neoliberal Transition

“…74 The prevailing monetary regime in South Africa is thus in actuality tied to this larger process of financialization-it compensates for the capital flight that has occurred since the removal of capital controls and deregulation, buttresses the currency against speculative pressures by drawing in capital, and also supports profit generation among global and domestic financial actors. 75 This shift to financialization has also generated a series of economic incentives and distortions within the post-liberalization South African economy in a fashion that has important implications for income distribution and corporate decision-making. To begin with, the country's integration into the global financial markets has created "New Forms of External Vulnerability" that directly and indirectly impact policy and the profit-making strategies adopted by domestic and international financial actors.…”