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Lehman Brothers warning that the rand could now be vulnerable.
The company's assessment came at a particularly sensitive time for the reserve bank governor, as he tried last week to win over critics of further foreign exchange liberalisation and described forex controls as "purposeless".
Lehman Brothers' annual Damocles Report, which measures the chances of a currency crisis, shows that South Africa's Damocles index has dropped from close to 100 in 2003 to 27 in the latest report. While this represents a significant improvement - a reading of 100 represents a 50% chance of a currency crisis - of the 17 emerging markets rated by the report, South Africa faces the greatest risk of a currency crisis after Turkey.
The report does allow the view that the kind of vulnerability with which the rand was associated in years gone by is unlikely to return if forex controls are relaxed. Yet the report also highlights several other potential pitfalls with such a relaxation.
These include risks associated with the government's drive to achieve 6% growth while failing to boost capital investment. This, the report argues, could lead to a further widening of the current account deficit, which stood at 3.4% of GDP in the second quarter of 2005.
Currently, capital investment in South Africa, at 17% percent of GDP, lags significantly behind the 22% European average.
At the same time, the government has often been criticised for being unable to spend its own cash - the budget deficit is a mere 1% of GDP. This is expected to change however, with the deficit forecast to average 2.1% over the next three years.
Picking over these fundamentals, most analysts end up agreeing that South Africa is ready for a further relaxation of forex controls.
These were originally put in place to prevent a repeat of the kind of capital flight seen in the aftermath of the Asian Crisis. However, advocates of a relaxation argue, confidence in the South African economy and currency is now much higher than it was back then.
The treasury has also made significant reforms to the forex regulations recently. Businesses can now invest up to 40% of their domestic capital outside of the country with permission from the treasury, but only 20% of these funds can be invested outside Africa. Also, fund managers will now be able to raise the percentage of their retail assets invested abroad to 25%.
Some analysts have argued that these reforms are specifically aimed at levelling the playing field for domestic banks in the wake of the recent Barclays ABSA deal. ABSA now has a significant advantage over its competitors because of the considerable financial muscle of its parent company.
Some restrictions still remain though. Finance Minister Trevor Manuel hinted in his mini budget last month that there could be a relaxation of forex limits for private investors on the horizon, but a new policy has yet to materialise. Individual investors are currently limited to the expatriation of just R750,000 ($111,200).
Many observers argue that further liberalisation is needed. Zdenek Turek, CEO of Citigroup South Africa, told OBG recently that he believes it is high time to relax forex controls. He believes that there are very few reasons for the regulations, especially since foreign exchange reserves are very high right now, at around $20bn.
"Companies that do want to invest abroad are getting approval on an ongoing basis anyway," he said.
Turek has told officials he is highly supportive of a significant relaxation or total abolition of forex controls.
"It is costing the banking industry additional expense," he added. "Across the industry, there must be thousands of people employed to just watch what needs to be watched in the exchange control regulations. Obviously these costs could be passed back to the clients."
When asked about the potential vulnerabilities for the rand, Turek said that the government had proved in recent years that it could manage the macroeconomic levers very well. He believed that this had raised confidence amongst South African companies, which are now keeping their money in the country and investing.
"There is also confidence from abroad because you can see significant investments both in the form of foreign direct investment and recently the stock exchange, which is booming," he said. "The reason money is coming is not so much because of interest rate differentials, but because of real interest in opportunities in this economy."
Many observers have agued that the widening of the current account deficit is largely a result of the high price of oil over the last year. South Africa ran a trade surplus in 2004, while the Johannesburg Stock Exchange has reached record highs this year on the back of the Barclays ABSA deal and the Vodaphone Vodacom deal - which together represent a massive vote of confidence in South Africa.
If both international and domestic investors continue to back the country at the current rate, total forex liberalisation appears almost inevitable.