How foreign spread has buffered SA’s funds

ANOTABLE milestone in SA’s financial history was passed in the second half of last year. For the first time, the value of South Africans’ foreign assets has come to exceed the value of the South African assets and debt held by foreign investors.

At year-end, our holdings of foreign assets, worth more than R6-trillion, exceeded our foreign liabilities by as much as R714bn.

The build-up in offshore assets legally owned and managed by South African businesses, pension and retirement funds, as well as directly by wealthy individuals, began from very modest levels in 1994, when South Africans became acceptable participants in global financial markets.

This has served South Africans particularly well in recent years as the domestic economy has been buffeted by a damaging combination of weak growth and higher inflation. Stagflation has accompanied a collapse in the currency, higher charges for utilities and a severe drought.

To top all these, we have seen (avoidably) higher borrowing costs imposed by the Reserve Bank.

The increasingly large foreign component in South African portfolios of assets has, therefore, helped significantly to mitigate the shocks to incomes and balance sheets. The protection has come in large measure from the shares they own in JSE-listed industrial companies whose major sources of revenues and earnings (as well as the costs they incur) are generated outside SA.

Among the successful industrial companies that began life in SA and have prospered abroad are Naspers, SAB, British American Tobacco, Mediclinic, Richemont, MTN, Steinhoff, Brait and Aspen. Up to 50% of the value of the JSE is accounted for by these large firms that we can describe as global consumer plays.

Before the rise of these now global companies, investors on the JSE would have been much more exposed to the highly variable fortunes of the resource companies that used to dominate the JSE. Without these opportunities to invest in world-class companies, as well as the investments made abroad by these companies and others based in SA, the value of local pension and retirement plans might have looked sad indeed.

Well-developed liquid capital markets not only provide companies and governments with access to capital. They provide wealth to owners, and their fund and business managers, with the opportunity to diversify away from firm or country-specific risks. Less risk translates into lower required returns of the investor or wealth owner. Lower required returns mean lower costs of capital for the firms hoping to raise capital to expand their businesses, more capital invested, a larger capital stock and a stronger economy.

This is one of the benefits of a well-developed capital market that can attract capital from savers everywhere and not only domestic ones — as has the South African capital market, where capital inflows have more or less matched capital outflows over the years.

Less risky returns also benefit the owners of intangible human capital committed to the local economy. There is always a global shortage of skilled professionals including managers of businesses, for which competition is intense.

By enabling skilled South Africans to invest abroad and diversify away from domestic risk, their required returns from South African sources have also declined. They are more willing to apply their skills in SA, and therefore more willing to sacrifice returns — employment benefits — because their wealth is better insured.

It has been wise of the government to relax exchange control over the years — it has helped the economy retain its skills and so better ride out economic misfortunes.

Less risk translates into lower required returns of the investor or wealth owner

Kantor is chief economist and investment strategist at Investec Securities.