TAX ON CAP­I­TAL IN­FLOW

Is this fair?

Finweek English Edition - - Front Page - JO­HANN VAN ZYL jo­hannv@fin­week.co.za

THERE’S A FAIR AMOUNT

of agree­ment in South Africa that the rand is cur­rently too strong – with the sub­se­quent dis­ad­van­tages this holds for things such as com­pany prof­its and em­ploy­ment. How­ever, the ap­proach adopted in get­ting the rand to weaken to “more re­al­is­tic lev­els” has led to sharp de­bate. It cer­tainly looks as if most an­a­lysts re­gard a tax on cap­i­tal in­flow into SA – as is be­ing con­sid­ered by the ANC – as un­de­sir­able.

CHRISTO WIESE,

for­mer Reg­is­trar of Banks, is one of those who pro­vi­sion­ally sup­ports such a tax plan, sim­i­lar to the 2% tax Brazil has levied on for­eign in­vest­ments in its cap­i­tal and share mar­kets since last year. “At this stage, we must do some­thing to get the rand to weaken and – bear­ing in mind Govern­ment has limited in­stru­ments for do­ing so – it can’t be sum­mar­ily shot down. It needn’t nec­es­sar­ily be 2% and – pro­vided it’s stated clearly it’s only a tem­po­rary mea­sure – it’s un­likely most in­vestors will think their money is un­wel­come in SA.”

IT COULD MAKE

SA’s mar­kets fall sharply at first, as was the case in Brazil, Wiese says. “Just as they re­cov­ered quickly there, they should also re­cover fairly quickly here and bring the rand to a more ac­cept­able level – say about the US$1/R8-R8,50 many feel is the best level. For­eign­ers must de­cide whether such a tax is too great a price to pay to share in the in­vest­ment ad­van­tages of an emerg­ing econ­omy.”

TWO FAC­TORS

could cause such a tax plan to boomerang, Wiese says. “It must be a tem­po­rary mea­sure and the Trea­sury must un­der no cir­cum­stances be­come so ac­cus­tomed to it that it can’t be got rid of again. And there’s the risk of the rand weak­en­ing too much – which would lead to other prob­lems.”

AC­CORD­ING TO

Brait econ­o­mist Colen Garow, a tax such as this makes sense, given the short-term and spec­u­la­tive na­ture of the cur­rent in­flow. How­ever, the mar­kets could re­act neg­a­tively to the tax and see it as a re­stric­tion on cap­i­tal.

UN­CER­TAINTY ABOUT

the re­ac­tion of over­seas in­vestors, the pos­si­bil­ity of the tax per­haps do­ing lit­tle to change the sit­u­a­tion (as hap­pened with sim­i­lar fis­cal in­ter­ven­tions in Chile, Rus­sia and China), pos­si­bly ex­tremely ex­pen­sive im­ports and neg­a­tive con­se­quences for in­fla­tion are seen as some of the risks on a tax on cap­i­tal in­flow.

THE UNISSEN

(who re­cently at­tracted at­ten­tion all the way to Par­lia­ment with his re­search on the ex­ces­sively high salaries of ex­ec­u­tive man­agers) feels such a tax would sim­ply fill the State’s cof­fers and wouldn’t achieve a mean­ing­ful ob­jec­tive. “The value of the rand is the re­sult of eco­nomic forces,” he says. “You can’t keep those forces at bay with ques­tion­able tax agen­das. They’ll sim­ply reap­pear else­where and then dis­turb the econ­omy again. Short-term gains (per­haps) can have se­ri­ous con­se­quences later.”

THE RAND

is so strong be­cause there’s a lot of cap­i­tal flow­ing to SA, says The­unis­sen. “How­ever, the cur­rent por­tion of the bal­ance of pay­ments tells a dif­fer­ent story: we’re im­port­ing far too many con­sumer goods and ex­port­ing too lit­tle. It doesn’t help try­ing to weaken the rand by dis­cour­ag­ing cap­i­tal in­flow. We should rather con­cen­trate on the cur­rent por­tion by dis­cour­ag­ing the im­port­ing of con­sumer goods and en­cour­ag­ing ex­ports. We must treat the ill­ness, not just the symp­toms.”

THE DEMO­CRATIC AL­LIANCE’S

shadow min­is­ter of fi­nance – Dion Ge­orge – says the rand be­came at­trac­tive to have be­cause of the ac­tiv­i­ties sur­round­ing the Soc­cer World Cup and the low in­ter­est rates in the de­vel­oped economies, es­pe­cially over the short term. He says a tax on short-term cap­i­tal in­flows won’t change it into a long-term in­vest­ment. “The ANC mustn’t con­fuse the aims of mon­e­tary and fis­cal pol­icy. It’s not about the value of the rand, but about a cli­mate that makes in­vest­ments at­trac­tive over the long term and cre­ates eco­nomic growth.”

PHILIP THE­UNIS­SEN, CEO Com­pu­tus

Man­age­ment Bureau

NO Don’t treat the symp­toms and not the ill­ness

CHRISTO WIESE, for­mer Reg­is­trar of

Banks

YES An in­vest­ment levy can’t be sum­mar­ily shot down

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