Treasury looking at offshore investment changes for South Africa

 ·30 Apr 2024

Finance Minister Enoch Godongwana says that the National Treasury is “evaluating” the impact of reforms introduced in 2022, which allowed South Africans and local funds to invest more money offshore.

This follows comments from the minister in February, where he conceded that increasing this limit to 45% was a mistake, and there are major disagreements in the Treasury itself about the decision.

The changes were made through amendments to Regulation 28 of the Pension Funds Act in 2022, which came into effect in January 2023.

The purpose of Regulation 28 is to protect investors against poorly diversified investment portfolios and exposure to risky assets by prescribing maximum investment thresholds that a pension fund may invest in, in line with asset categories allowed by the Regulation.

This includes the amount funds can invest in local infrastructure (which was increased to 45%), which asset classes are verboten (crypto assets were nixed), and how much money funds can invest offshore (the cap was raised to 45%).

Responding to a written parliamentary Q&A this past week, Godongwana said that the changes came following the 2020 Budget Review, which outlined reforms to modernise the foreign exchange system to “maximise trade and investment benefits in a globalised capital environment while complementing the African Continental Free Trade Agreement, to which South Africa is a signatory”.

“The reforms were aligned with the Organisation for Economic Co‐operation and Development (OECD) best practice Code of Liberalisation of Capital Movements,” he said.

However, at Budget 2024, the minister conceded that extending the offshore investment threshold to 45% was a mistake. It appeared to have the effect of funds and investors disinvesting in South African assets and handing money to foreign funds, with no benefit to South Africa.

This was also the view of various local fund managers, who said that the regulation change made life more difficult for them, and that they could have been introduced more gradually.

Despite the apparent damage and pushback, Godongwana said that reversing the change would not be easy, and there was not a “firm view” to changing them.

However, it appears that the wheels are turning within Treasury to assess the impact of the policy direction and look ahead to potential changes in the future.

“The National Treasury, alongside the Reserve Bank, Prudential Authority and the FSCA, will evaluate the impact of these reforms on the prudential, fiscal, and monetary policy frameworks,” Godongwana said.

“This research is intended to generate adjustments to improve the alignment of the frameworks and may affect the pace at which these reforms continue to be implemented.”

Read: Treasury clarifies South Africa’s new pension system – including issues around divorce

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