Clipping the Loonie’s Wings
What can be done to halt the damage to jobs and our economy being caused by the excessive appreciation of the Canadian dollar against the US dollar?Â The Bank of Canada have noted the problem, but appear to think there is no solution.
Erin has argued here that the Bank can always sell Canadian dollars, and that it is far easier to bring an exchange rate down than to prop one up.
And our government has a potential tool to hand in the form of taxes on short term inflows of foreign capital which appear to be the key force acting on the Canadian dollar today.
As the note below shows, other countries seem to be doing just that.
FACTBOX: Capital controls on the rise around the world
Thu Nov 19, 2009
LONDON (Reuters) – Authorities from Brasilia to Moscow to Jakarta are moving to curb what they say are ‘hot money’ speculative flows fuelling rapid currency appreciation and destabilizing their recovering economies.
With currency market intervention seen as increasingly inflationary, governments are resorting to direct capital controls to prevent local bubbles expanding and bursting.
In contrast to controls imposed by emerging economies at the height of the global financial crisis last year, the latest measures are aimed at slowing massive capital flows from investors seeking higher yields amid the persistence of near-zero interest rates in the biggest developed economies.
Below are some of the measures that emerging economies have either taken or are considering taking:
Taiwan this month imposed a ban on foreign funds investing in local time deposits, in a move seen designed to fend off appreciation pressures on the Taiwan dollar.
Indonesian officials have downplayed the prospect of capital controls after comments this week from monetary policymakers about possible curbs on foreign holdings of short-term central bank debt knocked the rupiah currency.
But Indonesia’s central bank was studying a possible limit on the foreign ownership of one-month central bank debt as an option to control hot money flows, a source told Reuters.
South Korea this week announced measures to tighten control over foreign exchange liquidity, including restrictions on currency forwards trading. The moves are expected to ease appreciation pressures on the export-focused country’s won currency, which hit 14-month highs this month.
India’s finance secretary on Thursday denied a newspaper report that the government was planning to cap overseas borrowing by Indian firms.
The finance minister has said India had the tools to deal with the influx of foreign capital if it became disruptive but this was not a concern yet.
Brazil this week unveiled a 1.5-percent tax on foreign investors converting American Depositary Receipts issued by Brazilian companies into receipts for shares issued onshore.
Last month, authorities announced a two percent tax on foreign investment in Brazilian equities and fixed-income securities to curb inflows that have driven the real currency 34 percent up against the dollar this year.
Chile’s finance minister on Thursday repeated a warning made last week that the government would act to curb the strength of the peso, which has surged over 20 percent against the dollar this year.
Colombia has halted the monetizing of dollars of the state assets it holds abroad as part of measures unveiled last month to reduce the strength of its peso.
Kazakhstan has introduced legislation that would allow it to enforce capital controls if necessary but the authorities have not used the option.
Moscow has allowed its ruble currency to scale new highs versus its euro-dollar basket but the central bank has said it could in theory consider a Brazilian-style tax on foreign capital flows. However, it stressed this week that it is against the re-introduction of capital controls and would prefer “soft measures” such as the monitoring of external borrowing of state-controlled firms.
Turkey’s constitutional court last month ruled in favor of making withholding tax on securities equal for domestic and foreign investors. Turkey scrapped the withholding tax for foreigners in 2006.
The ruling will go into effect nine months after publication, and in the meantime the government is working on fresh measures.
The court ruling is not a government-imposed capital control but analysts say it has the same impact on flows.
South Africa last month eased foreign exchange controls on domestic companies, increasing the limit for company applications to make outward investment and removing a 180-day rule deadline for companies to convert their foreign exchange into rand.
The rand has risen 25 percent against the dollar this year.