US embassy cable - 05PRETORIA4716

UNCLAS SECTION 01 OF 02 PRETORIA 004716 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND 
TREASURY FOR OAISA/JRALYEA/BCUSHMAN 
USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, ETRD, PGOV, SF 
SUBJECT: SOUTH AFRICA CONTINUES FOREX CONTROL LIBERALIZATION 
 
REF: 04 PRETORIA 5105 
 
(U) This cable is Sensitive But Unclassified.  Not for 
Internet Distribution. 
 
1. (U) Summary.  In a recent address to Parliament, Finance 
Minister Trevor Manuel announced the liberalization of 
foreign exchange controls for banks and investment 
companies.  This announcement, made during his October 
Medium Term Budget Policy Statement, was in line with South 
Africa's gradual liberalization of forex controls.  Banks 
will be able to commit up to 40% of their domestic capital 
outside the country, with a 20% limit on assets outside the 
African continent.  Once the South African Reserve Bank 
(SARB) has announced the effective date, banks could 
leverage up to R48 billion ($7.4 billion) in foreign 
markets.  Investment companies were immediately able to 
increase their foreign exposure to 25% of total assets.  No 
changes on forex controls for individuals were announced. 
Noting that the costs of foreign exchange controls may now 
exceed their benefit, SARB Governor Tito Mboweni has 
suggested that all controls be abolished.  Notwithstanding, 
Manuel seems intent on sticking to Treasury's policy of 
gradual liberalization.  End Summary. 
 
Forex Controls Lifted For Banks and Investment Companies 
--------------------------------------------- ------------ 
 
2. (U) In his Medium Term Policy Budget Statement on October 
25, Finance Minister Trevor Manuel announced the 
liberalization of foreign exchange controls for banks and 
investment companies.  Banks will be able to commit up to 
40% of their domestic capital outside the country without 
South African Reserve Bank (SARB) approval, with a 20% limit 
on assets outside the African continent.  This means that 
local banks could leverage up to R48 billion ($7.4 billion) 
in foreign markets, allowing them to compete on an equal 
footing with most international banks.  The move also helped 
to level the playing field between ABSA (now owned by 
Barclays) and the other major South African banks. 
Previously, banks had to apply for a special exemption from 
the SARB to operate freely outside South Africa.  The new 
measures are set to take effect once the government, the 
SARB, and banks have agreed on an appropriate reporting 
system. 
 
3. (U) The new foreign exposure limits will regulate both on 
and off-balance sheet bank assets.  Transactions will 
include underwriting foreign currency denominated bonds, 
lending foreign currency to non-residents, issuing 
guarantees, and investing in foreign bonds, shares, and 
other assets.  For the first time, South African banks will 
be allowed to extend foreign currency denominated loans to 
pay for approved South African company foreign direct 
investment. 
 
4. (U) Manuel also gave investment companies a break on 
forex controls.  After the announcement, mutual fund 
managers were immediately able to increase their foreign 
exposure to 25% of total retail assets, up from 20%. 
Investment fund managers were also able to invest 25% of 
assets abroad, up from 15%.  These measures enable South 
African residents to diversify their portfolios through 
domestic channels and allow South African investment funds 
to play a bigger role in the development of the African 
continent. 
 
5. (U) Manuel's announcement was another step in the gradual 
process of forex control liberalization that started in 1995 
(reftel).  National Treasury maintains that it will continue 
with this gradual process in the future.  Treasury's stated 
goal is to scrap all controls and replace them with limits 
on the amount of foreign exchange that can be taken offshore 
at any one time. 
 
No Change For Individuals 
------------------------- 
 
6. (U) No changes to exchange controls on individuals were 
proposed.  The current R750,000 ($115,000) limit on the 
amount of money that individuals may transfer abroad 
remains.  Manuel pointed out that the number of applicants 
applying to take out more than R750,000 was "miniscule," but 
that removing individual forex controls would likely be the 
 
PRETORIA 00004716  002 OF 002 
 
 
next step.  Before this can happen, government must 
terminate its amnesty program, scheduled for the end of 
2005.  South Africans who illegally moved or kept assets 
offshore after apartheid are allowed to pay an amnesty tax 
to repatriate funds or maintain their assets offshore 
legally. 
 
Mboweni Speaks Out 
------------------ 
 
7. (SBU) SARB Governor Tito Mboweni has publicly advocated 
that the government should consider abolishing what appear 
to be "purposeless" forex controls, pointing out that "the 
cost of exchange control administration and the 
inconvenience that goes with managing (them) might not be 
worth the exercise."  Mboweni argued that further 
liberalization of forex controls at this time would boost 
confidence in the South African economy and likely lead to 
capital inflows.  [Comment: Mboweni has become increasingly 
vocal of late, calling for labor reform and a U.S.-style 
Council of Economic Advisors for South Africa.  These public 
forays beyond the spheres of monetary policy have South 
Africans speculating about Mboweni's future political 
ambitions.  His current term as SARB Governor expires in 
2009. End Comment.] 
 
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