South Africa further relaxes exchange controls


South Africa said it would further relax foreign exchange controls to allow companies to top up capital in their offshore businesses and even invest outside their current business lines.

The changes mark the latest step by Africa’s top economy to move away from stringent controls over foreign exchange flows out of the country.

The National Treasury said companies would be allowed to invest offshore — outside their core business — so long as they did not acquire more than 20 percent in a foreign entity, Reuters reports.

The latest measures could be negative for the rand in the short term but “the amount of outflows could easily be offset by new inflows in a risk-on environment, which is a longer-term positive” said Razia Khan, head of Africa Research at Standard Bank.

Companies could also hedge up to 75 percent of their exposure in the forward market, for any financial year — without applying to the South African Reserve Bank.
“This is a major step forward,” Khan said.
“Dividend inflows from offshore investment will hopefully help reduce the income account deficit on the current account.” she added.

Inflows into South Africa in the past few years saw the rand gain as much 20 percent against the dollar since the beginning of 2009.

Instead of taxing inflows into the bond market — like Brazil — South Africa has opted for exchange controls relaxation and reserves accumulation to deal with the rand.

As a heavily-traded currency, the rand has been extremely volatile in the past few months, hitting a 28-month low of 8.4950 in September. It seemed to be on a firming trend in recent weeks and was last trading at 7.70 to the dollar on Thursday.

The government has repeatedly said it does not target a level for the currency and while it would like to see it stable it was at a loss how to achieve that.

With gross reserves of just under $50 billion, the government does not have enough of an arsenal to intervene directly in the foreign exchange market, even if wanted to.

The latest exchange controls measures could be negative for the rand currency in the short term but “the amount of outflows could easily be offset by new inflows in a risk-on environment, which is a longer-term positive”, Khan said.

In recent years, South Africa has raised the amount of money domestic institutions such as retirement funds are allowed to invest abroad.

The Treasury also made it easier for citizens to invest up to 5 million rand abroad annually as long as they adhered to “strict criteria” set by the central bank for disclosure and it abolished limits on alimony, wedding and travel allowances.

The South African Reserve Bank will release further details within a month, Treasury said.