Forex allowance: Will it stay or go?

By Magnus Heystek, Director and Investment Strategist

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I’m not a betting man, but if I were, I would be wagering a small amount of money that the foreign investment allowance for individuals is currently under review.

At present there are strong rumours swirling around in local financial circles that this allowance, currently R10m per year per individual, could be reduced or, under extreme conditions in financial markets—such as a downgrade of SA’s global ratings by the international credit ratings agencies—could be scrapped altogether.

The existence of a foreign investment allowance and the sharp increase from R4m to R10m as announced in last year’s budget did not sit well with the powerful allies of the ANC in the tripartite alliance, namely the SA Communist Party and Cosatu, the Congress of SA Trade Unions.

Cosatu in particular has been gunning at a number of features of the current ANC policies including the introduction of a minimum wage, the banning of labour brokers and the foreign ownership of property in SA.

The postponement by Government this week – to the absolute dismay of the financial services industry- of certain features of the Tax Administration Act, shows once again the enormous sway that Cosatu still holds over the governing party. This comes less than two weeks before the new regulations with regards to provident funds and pension funds would have come into being.

Investment companies have spent tens of millions of rands changing their administration systems to cope with the new laws, only to be informed by a red-faced Pravin Gordhan that the most controversial issue of the proposed legislation—the annuitisation of provident money into the future— will be postponed by two years. You can bet half your pension that this clause will not see the light of day.

Foreign ownership of land

The issue of the ownership of land—not only farms but all types of property—by foreigners, has long been a campaign issue for Cosatu. The announcement by Pres. Jacob Zuma in his State of the Nation speech earlier this that legislation will be introduced later this year to prohibit future ownership of farms by foreigners comes straight out of the handbook of Cosatu.

According to Cosatu restricting ownership of farms to foreigners does not go far enough. It should extend to all kinds of properties held by foreigners and should be retrospective in nature…..in other words foreigners should be stripped of their SA properties.

In response to the 2015 Budget Cosatu had the following to say on this issue: ”The policy (of restricting foreign ownership of property) is radical because it deviates from the neo-liberal economic view that developing countries should protect private property in order to attract foreign investment. Furthermore the policy might result in SA being classified as business unfriendly. Therefore the policy should be applauded because it is in the national interest and not foreign interest.”

Elsewhere in the document (www.cosatu.org.za/volume 24 May Day Special Edition) it says the following: ”The policy should apply to all land and not only agricultural land. It is not clear why non-agricultural land has been excluded”.

This viewpoint flies in the face of the annual assertion by the SA contingent to the World Economic Forum that “SA is open for business,” as pres. Zuma and his entourage tried to claim again earlier this year. On the one hand it wants foreigners to invest in SA; on the other hand it wants to ban foreign ownership of farmland and possibly in the future all kinds of property. No wonder foreign direct investment into SA last year dipped by 74%.

Cosatu has also been a strong driver in the campaign to limit the ownership of farms to 12 000ha per individual in SA, with any excess farmland to be bought by government with the aim to redistribute it.

Financial controls

In the same document one Khwezi Mabasa, under the title “Response to the Six Myths on the Post-Apartheid Political Economy” sharply criticizes the government for its “enhanced financial liberalization, which has allowed capital to flow freely in and out of the country, and diminish the state’s capacity to regulate financial transactions. In a clear directive he calls for enhanced regulation (prescribed assets anyone?) and introduce exchange controls.

The SA Communist Party, the third leg of the Tripartite Alliance with the ANC, have long been campaigning for a re-introduction of exchange controls, the introduction of prescribed assets to fund social projects and even the re-privatization of Sasol, amongst other things.

Money has been flowing out of SA quite consistently and steadily over the past few years as the decline in rand picked up speed and offshore markets started to offer better returns.

But since the events of the now infamous Nenegate in December last year, the outflow of money has turned into a raging torrent, as investors, both local and foreign headed for the exits. That partially explains the collapse in the currency from around R14 on the 12th December to almost R18 a week or so later. The rand has recovered from its  massively oversold positions since then but even at current levels of around  R15,50 is it still almost 30% weaker than a year ago.

I tried to get an idea of the extent of the outflow from the SA Reserve Bank but was told that such information is confidential.

Therefore I had to rely on a quick whip-around amongst fellow investment advisors and fund managers who confirmed the massive rush of capital heading out of the country. Each and every one confirmed the extent of the almost frenetic search for dollars, pounds and even euros.

Fund managers too have confirmed that many of them are bumping up against the maximum offshore exposure allowed in terms of Regulation 28, which controls foreign exposure, and had to stop taking in new money for their offshore feeder funds.

Stanlib, for example, has been forced to write to their clients in RA’s and Preservation Funds that if they don’t rebalance their portfolios that are in breach of Regulation 28, and that Stanlib will do it on their  behalf and place the money in a money market account, such is the pressure on them from higher up.

Local investors who have not yet utilized their full investment allowance of R10m might get a stay of execution in next week’s budget.

But I will definitely double up any bet should SA receive a downgrade sometime in the next 6 to 12 months. Then, as far as I’m concerned, the scrapping of the foreign investment allowance will be a dead ‘cert, as they say in gambling circles.

 

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