One doesn’t often get to praise an authoritarian socialist, but Tito Mboweni deserves credit for making progress on relaxing South Africa’s restrictive and out-dated foreign exhange controls.
There have, of late, been many reasons to criticise the minister of finance, Tito Mboweni. His Medium-Term Budget Policy Statement (MTBPS) was underwhelming, and merely reflected the dire state of an economy crippled by lockdown, corruption and deliberate anti-growth policies.
I warned right at the start of his term as finance minister that Mboweni is a dyed-in-the-wool socialist who favours a raft of ‘radical economic transformation’ policies, including outright nationalisation of all land, transferring 40% of all mining ventures to the state for free, and establishing a State Bank and a Sovereign Wealth Fund. I supported that warning by quoting his own words.
Many people have told me to relax, because he’s ‘one of the good guys’ in the ANC. Yet he recently showed his true despotic colours by tweeting: ‘One old man in Alexandra Township once called me aside during a meeting and said to me: babu Mboweni, tighten the state hand. It is a bit soft and nice. Squeeze! Let everybody feel the presence of state power and force. I agree with the old man. We are too nice!’
In Mboweni’s eyes, the problem with South Africa’s economy is that the state is not oppressive and dictatorial enough. Told you so!
There has been worrying news that South African emigrants would, from 1 March 2021, be required to prove non-tax-residency for three years before being allowed to cash out their retirement annuities. There have been repeated threats of prescribing that retirement funds must invest a percentage of their assets in government infrastructure projects and SOE bonds. The threat of prescribed assets appeared to have been withdrawn, to be replaced by merely permitting pension funds to invest in government projects, only to resurface again from a different source.
Amid all this noise, one policy matter that has gone by relatively unnoticed has been that of exchange control relaxation. Sasha Planting noted it in her post-MTBPS article for Daily Maverick. Three weeks later, Larry Claasen noticed it too, for Moneyweb, after economist Mike Schüssler drew attention to it.
In Mboweni’s speech, it merited a mere paragraph: ‘Today, we announce further steps to make cross-border business easier, including inward listings, loop structures and corporate foreign borrowings. Work is well advanced to modernise the cross-border flows management regime to support South Africa’s growth as an investment and financial hub for Africa.’
It was easy to miss, if you zone out whenever government officials make grand promises about the future economic utopia towards which they claim to be working.
In an explanatory note, however, Treasury explained that existing exchange control regulations – under which all foreign currency transactions had to be specifically approved – would be replaced by modern capital flow management principles, and in the meantime, government would accelerate the following measures to make it easier to invest in South Africa:
- Inward Listing instruments: All debt, derivatives and exchange traded instruments referencing foreign assets, that are inward listed, traded and settled in Rand on South African exchanges, will be classified as domestic. The classification of all inward listed shares denominated in Rand remains domestic.
- Loop Structures for FDI purposes: The full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank (FinSurv) as and when the transaction is finalized. This reform will be effective from 1 January 2021 for companies, including private equity funds, provided that the entity is a tax resident in South Africa.
- Corporate foreign borrowings: All bond and note issuances by South African corporates offshore (excluding SOCs) with recourse to South Africa, will be subject to framework and reporting conditions determined by the South African Reserve Bank, which will replace the current prior-approval process.
The impact of the first measure is effectively to remove the 30% restriction on foreign assets that applied under Regulation 28, Schüssler told Moneyweb. Although this doesn’t apply to directly held assets abroad, pension funds can now invest in locally traded funds that own foreign assets, which means they will no longer be limited in how much of their assets they can indirectly invest abroad as Rand hedges.
The loop structures provision will enable South African companies to establish offshore entities and raise foreign capital, as long as these offshore companies own assets in South Africa or its Common Monetary Area neighbours, Lesotho, Eswatini or Namibia.
In the past, many start-up companies were forced to leave South Africa in order to take advantage of foreign capital markets. There’s a reason entrepreneurs like Mark Shuttleworth and Vinnie Lingham left our fair shores for more accommodating foreign climes. This will make it much easier for companies to keep their operations in South Africa while accessing offshore capital markets.
In the past, companies had to seek specific permission to issue bonds denominated in foreign currencies. This will also no longer be required, again improving the South African economy’s access to foreign capital.
According to Planting, these changes signify ‘a fundamental shift in philosophy – away from control and command and towards a structure with a lighter regulatory touch’.
The most successful economies in Africa, including Mauritius, Botswana and lately, Rwanda, have very few or no restrictions on cross-border capital movement.
Light-touch foreign exchange regulation moves countries away from economic nationalism and towards international economic co-operation. They encourage foreign investment, and promote multi-lateral trade. They lighten the dead hand of the state on economic activity, and reduce the opportunities for corruption. Strict exchange controls can be effective in the short term to protect weak currencies against volatility, but they create structural imbalances in capital flows which in the long term strangle local economies.
That the government recognises the need to relax or remove exchange controls if it wishes the country to participate in global trade and, in Mboweni’s words, act as an investment and financial hub for Africa, is commendable.
The announcements last month were steps in the right direction. It shows real intent on the part of Treasury, in an area – unlike civil service wages or wasteful SOE spending – where it can actually make a difference.
For this, Mboweni is to be commended, even though he is still an authoritarian socialist at heart.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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