US embassy cable - 04PRETORIA5105

UNCLAS SECTION 01 OF 02 PRETORIA 005105 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, SF 
SUBJECT: SOUTH AFRICA TAKES ANOTHER STEP TOWARD THE 
LIBERALIZATION OF ITS FOREX AND CAPITAL MARKETS 
 
REF: PRETORIA 05007 
 
(U) This cable is Sensitive But Unclassified.  Not for 
Internet distribution. 
 
1. (U) Summary.  In his October Medium Term Budget Policy 
address to Parliament, Finance Minister Manuel took important 
steps in the gradual relaxation of foreign exchange controls 
that began in 1995.  He removed foreign exchange controls on 
South African corporations and allowed foreign company 
listings on the South African bond and securities exchanges. 
The government hopes that these changes will help South 
Africa become a larger player in global and regional capital 
markets, and attract more foreign investment to the country. 
South African Reserve Bank (SARB) approval is still required 
on all outward foreign investments.  Foreign investment 
restrictions still remain on individual investors, 
institutional investors, and corporate portfolio investment. 
End Summary. 
 
Corporate Foreign Exchange Controls Relaxed 
------------------------------------------- 
 
2. (U) In his October Medium Term Budget Policy address to 
Parliament, Finance Minister Manuel took another important 
step in the gradual relaxation of foreign exchange controls 
that began in 1995.  He removed foreign exchange controls on 
South African corporations.  The move makes it easier for 
South African firms to invest directly abroad, but does not 
apply to portfolio investment.  Previously, South African 
companies were restricted to R1 billion ($120 million) in 
outward investment and R2 billion ($320 million) when 
investing elsewhere in Africa (plus 20% of the excess cost of 
a particular project).  South Africa has been a leading 
foreign investor on the African continent despite these 
restrictions.  South African corporations may also retain 
foreign dividends offshore and, as from October 26, 2004, may 
transfer repatriated dividends offshore again for any purpose 
at any time. 
 
3. (U) The foreign exchange controls that remain restrict 
individual investors to holding no more than R750,000 
($120,000) in assets offshore and institutional investors, 
such as pension funds, long-term insurers, and investment 
managers, to holding no more than 15% of their total 
portfolio assets offshore.  Mutual fund managers may invest 
up to 20% of their portfolio assets offshore. 
 
Central Bank Still Has Final Say 
-------------------------------- 
 
4. (U) All South African companies must still apply to the 
SARB Exchange Control Department before investing offshore. 
The primary decision criterion is whether the investment 
benefits South Africa, but the size and timing of an 
investment may also be considered.  The SARB reserves the 
right to stagger capital outflows on large foreign 
investments to minimize the disruption on the local foreign 
exchange market. 
 
Foreign Secondary Stock Listings 
--------------------------------- 
 
5. (U) Manuel also recently announced that foreign companies 
would now be allowed to establish a secondary listing on 
South African securities bond and securities exchanges. 
South African individuals will be allowed to invest in these 
foreign corporations without restriction.  Institutional 
investors may also invest an additional 5% of their total 
portfolio assets in foreign corporations listed in South 
Africa.  (Note: This 5% is in addition to the imposed limits 
on offshore investment of 15% and 20% of total portfolio 
investment mentioned previously.  End Note.)  The government 
hopes that the move will entice more foreign companies to 
locate in South Africa. 
 
6. (U) Aquarius Platinum, an Australian mining company, will 
likely be the first foreign company to take a secondary 
listing on the JSE Securities Exchange (JSE) by the end of 
November.  Celtel, a pan-African cell phone company, is 
second in line and may take a secondary listing in the first 
half of 2005.  Anooraq, a Black Economic Empowerment (BEE) 
owned mining company with a local presence, is another 
company interested in a JSE listing.  (Note: Anooraq is the 
first BEE company with a primary listing in North America; it 
lists on both the Toronto (TSX) and American Stock (AMEX) 
exchanges. End Note.) 
 
7. (U) The South African Reserve Bank (SARB) still must 
approve all secondary listings in South Africa.  In line with 
New Partnership for African Development (NEPAD) objectives, 
which are championed by the South African government, its 
stated policy is to favor those foreign companies located in 
or undertaking most of their activities in Africa. 
 
Realistic Hopes 
--------------- 
 
8. (U) The government hopes that the relaxation of exchange 
controls and the introduction of foreign listings will 
encourage foreign investment in South Africa, improve the 
country's draw as a regional financial center, and facilitate 
global expansion by South African companies -- especially 
into the rest of Africa in support of NEPAD.  The government 
also believes that these changes will help grow the country's 
capital markets, improve market liquidity, and foster greater 
corporate competitiveness. 
 
9. (U) Government officials did not expect a flood of capital 
outflows as a result of this latest foreign exchange control 
announcement, since the decision was part of the gradual 
relaxation on foreign exchange and not made in response to 
demand.  Moreover, outward foreign investment has leveled 
recently, as South African companies appear to be more 
interested in expanding along with their own economy, which 
is being driven by strong consumer demand and historically 
low interest rates.  Officials expect large South African 
corporations and mining companies will be the first ones to 
take advantage of the nearly free reign to invest abroad. 
 
10. (U) Most economists agree that the rand will face only 
mild weakness as a result of this policy change, since the 
currency continues to be strong due to interest rate 
differentials with the markets of major currencies.  Indeed, 
the rand has appreciated 25% against the U.S. dollar since 
January 2003 and forex markets greeted the Minister's 
announcement with no discernible movement.  Only one labor 
and one NGO group expressed concern about creating 
"footloose" South African capital at a time when greater 
investment at home was needed to fuel higher growth and 
employment.  To them, the relaxation of foreign exchange 
controls seemed to fly in the face of government's goal of a 
gross fixed capital formation ratio of 25% of GDP by 2014. 
Currently, gross fixed capital formation is about 16% of GDP. 
 The opposition Democratic Alliance had no such worries as it 
publicly stated its support for Minister's decision.  It 
viewed the government's move as vote of confidence in the 
South African economy, and a signal of the end of foreign 
exchange controls born in the market distortions of the 
apartheid era. 
 
Comment 
------- 
 
11. (SBU) These announcements demonstrate South Africa's 
continued commitment to economic liberalization and to the 
eventual removal of all foreign exchange controls.  On the 
other hand, the SARB still must approve every foreign 
investment made by a South African company.  We will keep an 
eye on how transparent and/or sticky the approval process is, 
but believe it unlikely that the SARB, which is an 
independent institution owned by member banks, will create 
many difficulties.  The government wants to attract greater 
foreign investment, become a more prominent regional and 
global player in the capital markets, increase domestic 
market capitalization and liquidity, and foster greater 
domestic competition.  While the relaxation of foreign 
exchange controls is a step in the right direction, it is 
just one of the policy changes needed to accomplish these 
objectives. 
FRAZER