Budget to have little impact on rand strength

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Added on 27 October 2010 @ 4:31 PM

BUDGET MEASURES TO HAVE LITTLE IMPACT ON RAND STRENGTH

The new measures to ease exchange controls and raise offshore investment limits to offset the impact of global inflows on rand strength, as announced by Finance Minister Pravin Gordhan in today's Medium Term Budget Policy Statement (MTBPS), are all positive moves to open up the South African economy further, but are likely to have little impact on rand strength over the medium-term in the face of the continued global investor search for yield, according to Johann Els, senior economist at Old Mutual Investment Group SA (OMIGSA).

According to Gordhan, the rand's current real effective exchange rate is about 12% above its long-term average, due to strong foreign fund inflows, he said during his budget speech. Some of the measures announced today by National Treasury to help curb this strength included:

- Scrapping the 10% levy it charges emigrants to take funds above R8 million out of the country;

- Allowing residents to invest R4 million a year offshore, rather than the current R4 million in their lifetime limit;

- Making it easier for private and public pension funds to invest more in offshore assets by reviewing the current prudential framework for foreign investment (currently prescribing a 20% offshore limit);

- Allowing qualifying international headquarter companies to raise and deploy capital offshore without exchange control approval; and

- Reforming exchange controls on domestic companies to remove barriers to their international expansion from a domestic base.

"We don't expect there to be a sudden exodus of funds out of South Africa as a result of this policy easing," said Els. "Certainly there will be outflows over time, but the strength of global investor demand for South African assets like bonds and equities that is creating strong inflows and sustaining rand strength is likely to overwhelm any resulting outflows.

"With near-zero interest rates in many developed economies like the US, UK and Europe, investors such as pension funds are seeking higher-yielding investments in emerging markets, including South Africa, and these conditions are not likely to change in the near term. Acting alone, we aren't able to stop or reverse this inflow without doing damage to our economy - these measures can an only have an impact at the margins."

He added that the further opening of the economy was very positive. "It demonstrates that SA is moving in a healthy direction - the more we open ourselves up to global flows, the more the government is limited in its potential to implement unwise economic policies, as these would be met by negative international reaction."

The Treasury and Reserve Bank's combined commitment to continue to purchase foreign exchange reserves (using revenue overruns in 2010/11 and the issuance of government bonds) to curb the rand's appreciation could help smooth the local currency's moves, Els noted, but would prove expensive to taxpayers should the flood of foreign investor money continue. Again, he said, these interventions would only be effective at the margins and on a short-term basis.

Commenting on the MTBPS itself, Els said that the higher-than-expected revenues in the current fiscal year were expected, and meant lower budget deficits in the following years. This was also very healthy for the economy and could even attract further foreign investment.

Fairbairn Capital | Old Mutual

Investment Intelligence|Articles

Budget to have little impact on rand strength

BUDGET MEASURES TO HAVE LITTLE IMPACT ON RAND STRENGTH

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