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 investors – increasingly 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 derivatives 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 liberalized capital accounts, together with the prioritization 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 financialization of the South African economy.