Africa-Press – South-Africa. The International Monetary Fund (IMF) has warned emerging markets like South Africa to reduce their dependence on “hot money”.
This refers to capital which moves rapidly across financial borders, and is typically invested in assets that offer high short-term returns.
In its latest Global Financial Stability Report, the IMF said capital flow to emerging markets has increased eightfold since the 2008 global financial crisis.
Now sitting at a collective $4 trillion, the IMF explained that as much as 80% of this comes from nonbank sources such as hedge funds and insurance companies.
Most of this is in the form of portfolio debt liabilities, which now average around 15% of GDP in these emerging markets.
This can have significant economic advantages for these countries, including lower borrowing costs and easier access to funding for productivity growth.
However, the IMF warned that this comes with heightened risks of significant capital outflows in the event of global economic and geopolitical shocks.
“Abrupt retrenchments can intensify external financing pressures, raise borrowing costs, and trigger sharp currency depreciations, leading to financial strains that weigh on economic growth,” the IMF said.
“These risks have come to the fore in the context of war in the Middle East, as several emerging markets are experiencing a reversal of capital flows from nonresident nonbank investors.”
South Africa was among these impacted markets, with the rand falling more than 5% against the dollar in the weeks following the outbreak of the conflict.
Many nonbank entities pulled their investments out of the country and placed them into safe-haven assets such as gold, as these are far less susceptible to market volatility.
In mid-March, the country recorded its biggest weekly outflow of capital since 2019 as foreign investors sold a net R41.3 billion in government bonds.
The JSE’s All Share benchmark index also fell by as much as 14% in March from its peak in late February.
Building resilience to global shocks
Reserve Bank Governor Lesetja Kganyago
The IMF emphasised in its report that strong fiscal policy remains the key for emerging markets to be able to withstand financial shocks in the future.
“Nonbank investors are less responsive to an increase in global risk in countries with stronger institutions, ample reserve buffers, and lower fiscal risks,” the IMF said.
“Strengthening fiscal positions and external buffers can therefore reduce the risk of capital flow reversals and improve a country’s capacity to absorb external shocks.”
South Africa’s financial stability has proven somewhat resilient, as evidenced by the recent influx of foreign investment into the country.
The JSE All Share index recently reported its steepest climb in more than six years, spurred on by the announcement of a two-week ceasefire between Iran and the United States.
This caused the rand to strengthen as much as 2.6% against the dollar immediately following the announcement, the biggest single-day increase since November 2023.
While the rally in South African assets has strengthened the country’s finances, there is no guarantee that the surge is sustainable in the long-term.
The South African Reserve Bank (SARB) announced in late March that it would keep the country’s policy rate unchanged due to the uncertainty of the conflict.
The SARB has said that it expects the rates to increase further if the war lasts longer than expected, which would likely cause another massive outflow of capital from the country.
This is why the IMF has urged emerging markets to use its Integrated Policy Framework as a guideline for developing stronger fiscal policies to better absorb global shocks.
“To reduce volatility in cross-border portfolio flows, countries reliant on more risk-sensitive investors should strengthen macroeconomic fundamentals and institutional quality,” the IMF said.
“They should build robust fiscal and external buffers, and pursue proactive risk management consistent with the IMF’s Integrated Policy Framework.”
The IMF has further called for greater international cooperation to diminish the impact of cross-border financial shocks and strengthen global regulation.
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