CRAIG FEATHERBY: Relaxing exchange controls can help curtail the brain drain

Bar exceptions, the global economic outlook over the short to medium term is characterised by uncertainty. Developing nations, especially SA, must consider all policy options available to prevent a tax base and skills drain as higher-income individuals will be looking for calmer waters to secure their own financial futures in these economically turbulent times.

The global economic uncertainty is driven, in part at least, by strong inflationary headwinds. Developed economies are facing levels of inflation that haven’t been experienced in decades. Interest rate hikes are inevitable as we come to the end, or at least the tapering off, of the quantitative easing and stimulus/pandemic response spending, in an attempt to quiet demand and pull back inflation.

But these measures to contain inflation are coming at a time when Covid-19 is still rapidly spreading in parts of the world and disrupting global supply chains, which have also been clogged by a pandemic-induced shift in consumption. This has favoured consumer and primary goods over services.

In many countries demand for a range of consumer goods is outstripping supply, placing further cost-push pressure on prices. Supply chain issues are affecting input prices in many sectors, which, paired with the higher price of Brent crude, means inflation, in both developed and developing nations, will be brought down through monetary and fiscal means, and to a certain extent.

For developing nations the next two years will be a bumpy road. Inflation hits lower-income workers — especially those in countries with high levels of consumer debt like SA, hardest — making the monetary policy decisions to contain inflation particularly difficult. For heavily indebted countries, and particularly those that recently mounted costly Covid-19 responses, there is going to be significantly less room for social spending to ease/match the impact of inflation for lower- or no-income earners.

SA is by no means immune to these global economic challenges. Apart from the above, developed nations’ monetary and fiscal policy, especially that of the US, will have a knock-on effect here. Specifically, any decisions to taper off quantitative easing will make emerging-market investments less attractive as excess liquidity is absorbed, and dampen capital inflows in general — putting pressure on our balance of payments.

The SA economy is also adjusting, or trying to, to the “new normal”. The future of the office remains uncertain as we ask ourselves: will boosters mean a permanent return to pre-Covid work-life? Will business and tourism travel recover to previous levels?

Recent third-quarter 2021 GDP and unemployment data from Stats SA make unsettling reading. The contraction in growth of -1.5% and 0.5% rise in unemployment to 34.9% are indicative of the effect further political/social instability can have on the economy and livelihoods if there is a repeat of the events of July 2021. And conditions for a repeat are ripening.

Against this backdrop higher-income earners are looking for stable financial harbours and investments to protect their assets through the uncertain period ahead. If the recent sell-off in the US has shown anything, it is that when uncertainty looms large markets want to back companies with strong fundamentals over more speculative investments. This is why companies like Apple and Microsoft have come off their highs at a much lower rate than other more recent, disruptive offerings have.

Many higher-income earners in SA will be looking for these harbours in developed countries — and if they cannot move at least part of their investments with ease and without penalty, we face a serious risk of a further brain and tax base drain as these people choose to rather leave the country. It is imperative that the government do all it can to facilitate economic growth and development, which is why any policy decision that can be taken to keep skills and taxpayers in the country should be given serious thought.

I have previously argued about the benefits of allowing capital to flow freely, and how exchange controls are a relic of the past which are simply out of step with the modern integrated economy. But they also inhibit higher-income earners from being able to diversify their portfolios in an effort to buffer themselves against this economic uncertainty. Prohibitive exchange controls are also likely to prevent skilled South Africans who opt to work overseas from returning.

Doing away with exchange controls would provide higher-income individuals looking to leave the country with the alternative of diversifying into safer overseas investments, held alongside a balanced SA portfolio. Critically, it will help keep skilled South Africans in SA — staying put to fill skilled positions, run businesses, employ people and contribute to the fiscus. 

This is firmly in line with the vision of private sector-led economic growth and development set out in President Cyril Ramaphosa’s state of the nation address.

• Featherby is founder and CEO of Carrick Wealth.