Level playing field:
While SA will open up its markets policymakers will strive to ensure the economy does not suffer
The recent interest shown in the inward-listings exchangecontrol circular is welcome. The underlying issues are complex, and as with many financial sector policies there are trade-offs, and often winners and losers. SA is taking further steps to open up, deepen and strengthen our financial markets, while protecting consumers, investors and savers from undue risk and volatility.
In February, the finance minister announced a shift towards a more modernised capital flow management system with a shorter list of limitations. The announcement in October to broaden the scope of inward-listed instruments South Africans can invest in gives intent to this policy, but as with all reforms it has both benefits and risks that must be considered.
SA is a small, open economy with a low savings rate, and is therefore significantly reliant on foreign savings to help finance our growth. The country has no controls or limits on foreigners bringing in or taking out money from the country, as long as they do so within the law. We do have several restrictions on SA individuals, corporates and institutional investors, which have been gradually relaxed over the years, with due prudence at every step.
There are several reasons for allowing firms, funds and individuals to invest a portion of their savings abroad. First, to benefit from a broad range of investment opportunities in both developed and emerging markets. Second, to cushion against currency risks. Third, to promote confidence, as enabling money to flow out actually encourages inflows and for more money to remain inside the country. Furthermore, SA companies often complain that they are asked to compete with foreign companies that have cheaper access to foreign capital due to exchange controls not applying to foreign firms.
There are good reasons to have some prudential limitations on capital leaving the country, especially savings in retirement funds and the reserves of insurance companies. Pensioners save to fund future consumption in SA. Insurance companies accumulate liabilities in SA. It is only correct that regulators require retirement funds and insurance companies to keep the bulk of their funds in SA since the bulk of their liabilities are here.
To date this policy balance has worked well. SA investors can have a well-diversified portfolio of assets that can benefit from global markets while protecting themselves against undue volatility. In addition, SA has been able to attract foreign capital, benefiting both government and private investors.
Retirement funds and other institutional savers can at present invest 30% of their funds abroad (with an additional allowance for investment on the African continent). They can also buy shares in foreign companies that have an inward listing here in SA. For example, South Africans can invest in foreign companies that have a secondary listing on the JSE (like BHP Billiton or AB InBev) as part of the “domestic” or “local” portion of their funds. However, if these companies raise debt through a bond, in rand, retirement funds cannot buy these instruments as part of their domestic allowance.
The key objective of the reform is to level the playing field in terms of the instruments SA investors can invest in as part of their domestic allowance. Second, the reform aims to entice foreign firms to raise debt here for investment, either in SA or abroad. In this vein, the SA Reserve Bank issued a circular enabling a broader range of financial instruments listed on our stock exchanges to be held by local investors and retirement funds.
After the circular was issued it came to the attention of policymakers that there was a possible loophole in the regulations that could in effect see a retirement fund invest all of its funds in a foreign currency asset through exchange traded funds that reference a foreign share (for example, the Facebook or Tesla share). This would not be prudent and is contrary to long-standing policy objectives of the government, leading to the Bank withdrawing the circular.
Yes, ideally policymakers should have foreseen all the possible loopholes or adverse effects, but sometimes it is difficult to identify all possible risks. The lesson for us as policymakers is to extend the public comments process after announcements, as we do with most other policy initiatives.
It is clear from the response that some players in the financial sector could benefit or lose substantial amounts of money through such changes to these regulations. This is not uncommon. The Bank, Financial Sector Conduct Authority and National Treasury often deal with market and price-sensitive policy matters. Our aim and mandate is to act neutrally, without fear or favour, in the best interests of SA savers and the resilience of our financial system.
However, we do expect better from regulated entities when they raise their concerns or criticisms; that they do not undermine the regulatory process and regulators. Twitter is not a forum for complex public policy debate.
SA will gradually open up our market to enable the country to meet its investment needs and support SA firms to compete fairly, here and abroad. There are legitimate debates about the pace at which these reforms take place and how we balance risk and benefit; we welcome these debates. The government will continue to enhance the resilience and strength of our financial sector to support economic growth.