Johannesburg: South Africa may join Brazil in imposing a tax on short-term foreign-capital inflows when the country delivers its budget this week in order to prevent dramatic swings in the currency, according to BNP Paribas.
Finance Minister Pravin Gordhan may unveil the measures when he delivers his annual budget speech on February 17, Elisabeth Gruie, a London-based emerging-markets currency strategist at BNP, wrote in a client note. The measures may take the form of a tax on foreign investments in the country's bond and equity markets, she said separately by telephone.
"We've seen measures aimed at curbing foreign inflows implemented in Brazil and there's also been talk in other countries," said Gruie. "We think similar measures could be implemented in South Africa to tame the carry trade, especially after all the talk about the rand being overvalued."
Brazil imposed taxes on overseas investors of its stocks and fixed-income assets in October after the real rallied almost 33 per cent to best-performing emerging-market currency. Turkey's Finance Ministry plans to impose a withholding tax of between 3 and 5 per cent on profits earned by all investors in bonds and other assets after the Constitutional Court revoked a previous system that exempted foreign nationals from paying, Milliyet newspaper reported February 3, citing unidentified officials.
The rand rallied 28 per cent against the dollar last year after foreign investors purchased a net 101.2 billion rand (Dh48.59 billion) of South Africa's assets, reversing a record 70.8 billion rand of net sales in 2008, which caused a 26 per cent tumble in the currency.
The central bank's benchmark rate was 11.5 per cent at the start of last year, making the rand an attractive purchase in so-called carry trades, in which investors borrow in countries with low interest rates to invest in markets with higher returns. They earn the spread between the cost of borrowing and the returns on their investment.
South Africa needs policies that promote a stable exchange rate, Collins Chabane, head of performance monitoring and evaluation in the presidency, said in Cape Town.
