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South Africa Revises Foreign Investment Limits

by Lorys Charalambous,, Cyprus

16 December 2010

In accordance with the previous statements by South Africa’s Minister of Finance, Pravin Gordhan, that details of proposed changes to financial and foreign exchange regulatory arrangements would be published before the end of this year, changes to the prudential foreign asset limits for institutional investors have now been issued.

It was pointed out that the government has previously announced reforms to improve the capacity of South Africa to better manage flows of capital, and to complement the current system with a macro-prudential approach to the regulation of foreign exposure. Reforms aimed at shifting towards prudential regulation for institutional investors were originally made in the 2004/2004 Budget, and a number of further announcements were made in the 2010/2011 Budget and in the 2010 Medium-Term Budget Policy Statement (MTBPS).

The difficulty, it was said, is to adopt a prudential approach to regulating foreign exposure aims to manage and encourage two-way flows of capital, whilst also allowing the South African economy to respond to external shocks with appropriate policy instruments. In addition, “a gradual and sequenced liberalization of exchange controls also protects the economy against large outflows of domestic capital and an increased reliance on volatile foreign capital. The country’s approach to reform therefore takes cognizance of the need to find the right balance between supporting outward investment and cushioning the economy against shocks.”

In the 2010 MTBPS, Gordhan announced that “the prudential framework for foreign investment by private and public pension funds, including the Government Employees Pension Fund will be reviewed to support portfolio re-alignment and offshore diversification of these funds, especially in the rest of the African continent and into other emerging markets.”

In fact, current analysis has demonstrated that a number of institutions, in particular retirement funds, representing a significant portion of investable assets, could be constrained by the current prudential foreign asset limit. Therefore, as part of a package of measures to respond to surging portfolio inflows and to accord with the Gordhan’s announcement, the National Treasury has announced a 5% increase in the limit to the percentage amount that institutional investors can invest offshore.

The prudential foreign asset limit for retirement funds and long-term insurers (non-investment linked) has risen from 20% to 25%, and for collective investment schemes, investment managers and long-term insurers (investment linked from 30% to 35%.

However, the National Treasury has reminded investors that the increase in prudential foreign asset limits should also be regarded as a mechanism for absorbing current holdings of inward listed instruments not having a domestic classification. Specifically, this includes those inward listed shares which have been granted an extension or exception by the Minister of Finance to allow for their holding outside the foreign investment limits for a transition period that will expire in the next two years.

It was also disclosed that, to allow for more time for internal consultations within the government, the release of the comprehensive discussion document, entitled “Strengthening the financial sector to better serve South Africa”, is postponed and will now be released for public comment in February next year.

TAGS: South Africa | investment | law | financial services | insurance | offshore | regulation | services | Africa

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