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A seemingly nondescript change in regulations has resulted in the largest relaxation of exchange controls in South African history.
The move, announced last month in an explanatory note published by the Treasury in the Medium-Term Budget Policy Statement, has lifted the limit for South Africans to trade in foreign assets.
“All debt, derivatives and exchange-traded instruments that refer to foreign assets, which are publicly traded, traded and settled in rand on the South African stock exchanges, will be classified as domestic. The rating of all rand-denominated publicly traded stocks remains national. ”
This means that if a publicly traded company has assets abroad, there is no longer a limit to the amount it can have, as long as it trades these assets locally and in rand.
Mike Schüssler, chief economist at economists.co.za, says this seemingly ordinary statement is far-reaching.
“This is the biggest relaxation of exchange control this country has ever had,” adds Schüssler.
The change is huge because it effectively removes the 30% foreign investment limits if the investment is listed locally and traded in rand. This means that local pension funds, which collectively have an asset pool of around R4 trillion, pending the aforementioned provisions, are no longer limited in how much they can invest abroad.
The explanatory note says that to support the growth of South Africa as a financial and investment center for Africa, this move is part of “far-reaching reforms to modernize the capital flow management framework” first announced in the budget of February 2020.
If the Treasury note is to be believed, more changes like this are coming.
“These reforms will result in the gradual elimination of the current exchange control regulations to be replaced by new regulations under the Exchange and Currency Act of 1933.”
Taken by surprise
The change, which took everyone by surprise, also reclassified the domestic assets of exchange-traded funds (ETFs) as domestic assets, says Magda Wierzycka, CEO of Sygnia.
“It is a gentle relaxation of currency controls, giving South African investors and the economy a much-needed boost, while maintaining general limits on how much South Africans can physically externalize.”
Wierzycka says: “The circular goes so far as to list the categories of investors who can now treat these instruments as domestic, including institutional investors, trusts, associations and companies.”
This change is a particularly good move for low-cost asset managers like Sygnia, as it allows them to sell a wider range of offshore products that have better growth prospects than those in South Africa.
“The mechanism that allows investors to diversify their strategies through index-tracking ETFs not only enables the potential for lower-risk and more attractive returns, but also at a low cost. Given the pedestrian returns on domestic stocks and listed properties in particular, a boost in return on investment is a boost for the economy. ”
Uncovered
The 30% cap has long been a problem for institutional investors as it has limited their investment options on the JSE, which has seen the number of listings drop from 410 ten years ago to 341 today.
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Wierzycka points out that since the shares in many of the listings are illiquid, the investment options available to investors are much more limited than the total number of companies on the exchange.
Naspers and Prosus, thanks to their exposure to Tencent, make up 21% of the JSE; this is also a problem for investors. With the 30% limit, they have to limit how much they can invest in other offshore entities, as many are already exceeding this purchase limit with a single share.
Wierzycka says that people under the age of 55 will likely benefit the most from the change, as they are still accumulating their savings.
However, those 55 and older who have accumulated significant savings can also benefit from it, as they can “convert from a retirement annuity to a vital annuity and invest 100% of their vital annuity assets abroad.”
