Liberalisation’s many returns

IT WAS ALSO A PROCESS THAT MADE SA A MORE ATTRACTIVE INVESTMENT DESTINATION

One announcement in Wednesday’s budget that attracted relatively little attention was what was, in effect, the first liberalisation in exchange-control rules for South African institutional investors in eight years.

The move is a welcome expression of confidence by SA and it should be to the benefit of the savers, pensioners and policyholders whose money institutional investors invest.

These rules have long ceased to be exchange controls, technically speaking, and are rather prudential regulations that lay down the proportion of their assets that institutional investors such as pension and provident funds can hold offshore.

With the budget, Treasury announced that the limits for retirement funds would be increased to 30%, from 25%, while the limits for collective investment schemes – such as unit trusts – and investment managers would be increased from 35% to 40%. Over and above this is an allowance for investment into the rest of Africa, which is to be increased from 5% to 10% — so in principle a pension fund could now have a total of 40% of its assets invested outside SA, 10% of this in Africa. The Reserve Bank will have to issue a notice to make this official before investors can actually take money offshore.

But the move is the culmination of a long process in the democratic era in which SA has opened up its borders to allow institutions and individuals to invest offshore, lifting rigid controls that had kept money trapped at home during the apartheid era. The limits for institutional investors, which were lifted in steps through the early and mid-2000s, were last increased in 2010, when the rand strengthened in the wake of the financial crisis.

The gradual liberalisation enabled fund managers to start making more rational decisions about where in the world to invest their money — based on their own objectives and models, rather than on the desperate need to get money out of the country if they possibly could.

The process of liberalisation was also very important in signalling to markets that SA was now confident enough of the robustness of its economy that it didn’t have to worry that massive amounts of capital would take flight if it opened up its borders. It was also a process that, perhaps paradoxically, made SA a more attractive investment destination for international investors because it was a more open economy.

The latest move will signal that. It will give fund managers more flexibility to diversify their assets and hedge their risks, where appropriate, and it won’t necessarily result in huge outflows. Many fund managers by the end of last year were already over their limits, because a weak rand had upped the value of their offshore assets relative to their local ones, so they may not have much more scope to take funds out. As important is that 30% (or 40%) seems to be pretty much the maximum that most pension funds would want to have abroad, prudentially speaking. So the new limits should give them the flexibility to make rational decisions about asset allocation, in the context of their own objectives and models, rather than necessarily impelling them to take more money out. The tax authorities should gain comfort too – the more institutions can externalise funds transparently and legally, the less excuse they have to invent fancy cross-border structures to take money out in ways that deprive the South African fiscus of revenue.

And when it comes to SA’s much vaunted desire to strengthen its links in the continent and provide a gateway to Africa, the new limits could play a role too. There are plenty of opportunities for institutions to invest in alternative assets in Africa such as private equity or infrastructure vehicles that can offer high returns, even if with higher risk, and the new limits will give institutions an incentive to come up with more of these African vehicles and opportunities in which local and global institutions can invest.

That should be good for SA’s relationship with its neighbours, as well as yielding potentially good returns for the locals.