Economics Editor

LIFTING the remaining foreign exchange (forex) controls within two years, rather than more gradually, as government prefers, would be most beneficial for economic growth, foreign direct investment and the rand, says a new study by investment bank Goldman Sachs.

Carlos Teixeira, one of the authors of the report, said yesterday economic conditions were currently favourable for a complete removal of existing controls, which restrict South African residents and companies from investing abroad.

Removing the remaining forex controls over a two-year period would boost trend growth in gross domestic product (GDP) by one percentage point and double net foreign direct investment inflows, the report shows.

But while the lifting of exchange controls has been suggested by some critics of the strong rand as a way of weakening the currency, Goldman Sach's research shows that the opposite would occur.

If forex controls were lifted within two years, the equilibrium fair value of the rand which Goldman Sach's estimates is currently about R6,50 against the dollar would appreciate 20%.

The report, which is based on the historical performance of developed and emerging market economies that have already liberalised exchange controls, also suggests the asset class to benefit the most would be equities, with price-earnings ratios doubling if controls are lifted.

The report shows that the pace of liberalising exchange controls mattered, with the longer it takes , the smaller the benefits to growth, investment and equity market become. "There is no better time than now to liberalise exchange controls.

"SA has the right conditions to remove controls, such as political stability, macroeconomic stability, debt levels under control, a transparent monetary policy and strong regulatory environment."

Goldman Sachs International MD Colin Coleman said lifting the controls was, however, not a "magic wand" to solve SA's economic problems.

"Capital controls are part of the measures to improve growth. But I don't know any measure in government's hands where it can increase GDP by one percentage point and double investment."

Jul 16 2004 07:29:39:000AM Nasreen Seria Business Day 1st Edition