Changes to exchange controls are good for both pension funds and investors as they open South Africa up to more international investment opportunities, says chief economist at Stanlib, Kevin Lings.
Speaking with ENCA, Lings said that the change of current pension fund rules effectively allows pension funds to take more money offshore, anywhere they want.
This follows South Africa’s largest asset managers warning that changes to the country’s offshore investment rules could lead to billions leaving domestic markets.
An amendment to prudential rules announced in February’s budget enables pension and mutual funds to invest 45% of their assets abroad, up from 30% previously. That’s the largest adjustment yet made to the offshore limit and gives South African investors the chance to fundamentally re-balance their portfolios.
Simply put, this means that there is now just one prudential limit for South African institutional investors of 45% exposure to foreign assets. It is therefore theoretically possible to comprise the foreign exposure of an institutional investor entirely of African or non-African assets.
The change means anywhere between R550 billion – R800 billion could leave the country over the next five years, said RMB Morgan Stanley in a recent research note.
“Previously, there was a limit in place with regards to how much you could take offshore across the world and then a certain limit applied to investments within the rest of Africa. And what the government has said is they are combining those two limits into one limit of 45%, which means that pension funds can then take their money and place that anywhere in the world,” said Lings.
The economist said that pension funds will use that ability more actively – and in time could see more money moved offshore. He said the amount would vary, “but yes, a few hundred million certainly could move”.
In February’s budget speech, it was announced that the amendment would enable pension and mutual funds to invest up to 45% of their assets abroad, up from 30%. Lings said this is a big step forward as it has provided the industry with a large amount of flexibility, offering more choice to investors.
He said that in the short term there will be some unintended consequences, especially within the current macro economic cycle, however, “in the longer term, is it good move? Yes, you have to welcome this type of relaxation – it’s what the industry has been asking for.”
Lings said that it eliminates any concern that money is ‘trapped’ in South Africa – a legitimate concern for many years.
There could have been an alternative approach by the government where amendments could have been more gradually introduced to allow for the adjustment to be more systematic rather than a potential significant outflow risk, Lings said.
A more gradual approach could have eased concerns for businesses in South Africa “that want to perhaps have that money in South African hands rather than flow internationally”.