South Africa cuts forex controls to curb rand

Business Day, 28/10/2009

THE Treasury unexpectedly announced sweeping new measures to relax exchange controls yesterday in a bid to weaken the rand to a more “competitive” level and cut red tape for investors.

“We are concerned about the fact that the exchange rate is as strong as it is — we wish we had the capacity to intervene in a more assertive way than we are able to do at the moment,” Finance Minister Pravin Gordhan said.

He was speaking to reporters at the release of the Treasury's medium-term budget, which makes it easier for companies and individuals to invest offshore.

The rand weakened nearly 1% to R7,69/ in response to the news, which was widely welcomed.

The measures included removing a 180-day time limit during which local companies were required to convert foreign exchange earnings into rands, although they still have to repatriate the money within a month.

South African companies will now be able to open foreign bank accounts without prior approval. Local firms can also now invest up to R500m anywhere offshore without prior approval, up from R50m previously.

A foreign capital allowance for residents — last adjusted in 2006 — was doubled to R4m.

“This is definitely unexpected and a pleasant surprise. It shows the authorities are being more long-term in their thinking,” said Razia Khan, Standard Chartered regional research head, Africa.

The rand has been one of the best-performing currencies in the world this year, scaling a 14-month peak at R7,15/ earlier this month.

Its sustained strength has threatened to erode the competitiveness of local exports and undermine SA’s fragile economic recovery.

Reserve Bank officials have said it is expensive for them to mop up the excess rands generated by foreign exchange purchases, which would normally help weaken the currency.

Treasury officials said they were “confident” there would not be a big outflow of capital at a time when the global financial crisis has forced many other countries to tighten financial regulations.

“We are confident South Africans will invest in our country, they’ve seen the grass is not so green on the other side,” Treasury deputy director-general Ismail Momoniat told Business Day.

“We are confident we can relax these things ... we think South Africans will see this as a good place to invest.”

The decision to loosen exchange controls was seen as a masterstroke that would keep markets, business and labour unions happy. It also signalled that the authorities were confident the rand would find its feet regardless of the global circumstances.

“This will be welcomed by investors. The shift to the left — if there is such a thing — has not detracted from market-friendly policy so far,” Khan said.

Analysts say the rand has appreciated or depreciated 20% in seven of the past 14 years. Its volatility is a much bigger concern than its level as it makes it difficult for business to plan ahead.

“A more stable and competitive real exchange rate is important for growth,” the Treasury said. “Reform of exchange controls can facilitate greater two-way flow of capital and help to reduce volatility.”

Treasury officials said they had not taken a view on the most desirable level of the rand. Treasury director-general Lesetja Kganyago said there were no official estimates of capital outflows. “Who knows, there may be capital inflows,” he said.

“What’s important is to undertake reform with a goal in mind ... you want to lower the cost of doing business, and remove the hassle factor with respect to exchange controls.”

There were rumours last week of a plan, backed by Economic Development Minister Ebrahim Patel, to fix the exchange rate of the rand at a particular level, which is impossible in the face of global market forces.

Gordhan said the Treasury would assist the Reserve Bank in any way it could to build its foreign exchange reserves, which help cushion the economy from external shocks and make foreign exchange intervention possible. They stand at about 40bn.

Scott Picken, CEO of IPS says, “The new changes in the reserve bank legislation are very exciting for South Africans. Now they can take out R4 million per person and also R750 000 per year as a travelling allowance. This allows them a far greater opportunity to take advantage of the opportunities overseas, especially if they had reached the original limit of R2 million. With a strong Rand and good growth prospects in Australia, along with the guaranteed market related rentals through the leaseback program, this is certainly something South Africans should be looking into at the moment. We also have some very exciting prospects which we are about to Launch in the London!"

Go to www.ipsinvest.com for more information.
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