SA boosts status as springboard into Africa
Local groups will find it easier to expand abroad
SOUTH Africa has taken bold steps to enhance its status as a springboard into Africa, significantly relaxing exchange controls, which will also enable domestic companies to expand operations outside the country and raise capital offshore.
Finance Minister Pravin Gordhan announced the initiative in his budget speech on Wednesday, saying it would help local companies take advantage of investment opportunities offered by the region growing at the second-fastest rate in the world.
Africa has replaced Europe as the main market for locally manufactured exports and is already providing a growing influx of dividend payments, which will help narrow the large deficit on its current account, the broadest measure of trade in goods and services.
Expansion into Africa and regions offshore would also boost corporate tax revenue at a time when the government needs money to finance its hefty debt burden, which is a threat to its international credit ratings.
“What South Africa needs to do both as the private and the public sector is to seize the potential opportunities on the African continent even more strongly than they have,” Gordhan said before his speech.
“Secondly, [it needs] to seize the opportunities that might arise and probably will arise from a better global environment . . . above all, government is very committed to ensuring that we create the right climate for investment.”
In its 2014 budget review, the Treasury said that it would introduce “foreign member funds” into the country’s financial landscape — which would
In terms of increasing SA’s relevance to Africa, this is a master stroke
be collective investment schemes, private equity, venture capital and hedge funds.
These entities would not be subject to the limits capping the amount of assets which domestic funds can invest offshore, although they would still be domiciled, managed and tax compliant in the country.
The step aims to make South Africa a hub for African fund management, and enable local investors to get more exposure on the continent and elsewhere.
“In terms of increasing South Africa’s relevance to Africa, this is a master stroke,” said Razia Khan, Standard Chartered’s regional research head for Africa. “It shows a lot of promise, and plays to South Africa’s existing strength in financial markets and services.”
Enhancing ties with Africa is becoming increasingly important as the continent is expected to grow at an average pace of 6.1% this year. Foreign direct investment into the region rose 16.2% last year.
After Malaysia, South Africa is the largest developing country to be investing in Africa, investing R36-billion a year on a range of industries.
The continent also accounted for 12% of South Africa’s dividend earnings in 2012, up from 2% in 2002, and absorbs 28.2% of its exports.
The Treasury said it would let unlisted technology, media and telecoms, exploration and other research and development companies freely list offshore to raise capital for their opera- tions, provided they retained South African incorporation, remained tax residents and were controlled and managed from South Africa.
Their intellectual property must remain registered in South Africa, and they will also need to have secondary listings in the country within two years of successfully listing offshore.
“Given South Africa’s history, and the early debate on allowing entities to list offshore, this is hugely significant. It demonstrates a new level of self-belief — with the government behind the global expansion of its corporates,” Khan said.
The Treasury also said it was extending a “HoldCo” subsidiary regime, which it intro- duced last year to enable JSElisted entities to hold African and offshore operations, which would still have to operate as South African tax residents but would be subject to less restrictive exchange control regulation.
It boosted the size of per- mitted transfers from the domestic entity to the HoldCo to R2-billion a year from R750-million, and also allows the transfer of up to 25% of the listed company’s market capitalisation on application to the Reserve Bank.
Unlisted companies may now operate HoldCos under the same restrictions as listed companies, except that the size of transfers to the new entity is limited to R1-billion a year, and they must have similar transparent and public reporting and disclosure requirements as listed companies.
The package of measures also allows authorised dealers in foreign exchange to participate in foreign syndicated loans regardless of whether the borrower is South African resident or not, provided that this is within the approved foreign exposure prudential limits.