In 2007, South Africa paid out a massive R203 billion in dividends, and in the first two quarters of 2008, it was already running a dividend payment account of R120bn. Kevin Lings of Stanlib was quoted as saying: “Dividend outflows… form the largest contributor to South Africa’s deepening current account deficit.”
That was then. Just a few days ago, the Reserve Bank released figures that suggest a deepening crisis of current account deficits, of which dividend outflows to non residents remain a major component.
The release of facts and figures pertaining to our country’s balance of payments, and the worsening current account deficit, raise a vexing question: has the relocation of primary listings by South African companies to London and elsewhere really served the interests of our nation state? I am aware that the question is contrarian in the world of free markets, and as such it may be misconstrued as a call for protectionism. However, I must hasten to reaffirm my conviction that the framing of conversations is not the preserve of merchant bankers and corporate lawyers and globalisation thought leaders alone.
The place to start searching for answers to the vexing question is in analysing the track record of the companies that chose to move their primary listings to London, and hence their overall impact on the South African economy.
When you review the pre-listing statements of some of the South African companies that sought to change their primary listings to London or elsewhere, they argued that offshore listings offered certain advantages they would be denied if they maintained a primary listing on the JSE.
Accordingly, before such requests for offshore listings were granted, the applicants needed to commit to and prove, among others things, that arising from their offshore listings, there would be definite balance-of-payments benefits for South Africa; the country’s gross international reserves would not be adversely affected by a net outflow of dividends or any other funds; and that the company involved would match the dividends declared to the foreign holding company, with the dividends paid to South African shareholders to preserve balance-of-payments neutrality.
Between 1997 and 2002, five of South Africa’s biggest companies received approval to move their primary listings from the JSE to the London Stock Exchange (LSE). These were Billiton (housing Gencor’s non-precious metal assets), SA Breweries, Anglo American, Old Mutual and Dimension Data.
Back in 1999, SAB believed that offshore listing would put the company in a better position to pursue a growth strategy based on greater access to world capital markets. Furthermore, the then management of SAB, which, incidentally has largely remained intact, believed that the LSE listing would enhance SAB’s ability to take advantage of mergers and acquisitions in the international brewing industry and to compete with other international brewers for development opportunities. By and large, SAB has remained true to form and almost achieved most of these advantages. It has grown, organically and acquisitively, to become one of the global best brewers, in terms of size and profitability. The management of SABMiller is mainly South African, and proudly so, I would like to believe. Arguably, SAB is the best case study for offshore listings. Notwithstanding its strategic success, the question really is: To what extent has the offshore listing of SAB benefited South Africa’s current account?
The question then is, besides the SAB success in terms of strategic objectives, what has been gained by South Africa Incorporated through the offshore listing of its erstwhile giants? Just as one cannot deduce unpatriotic behaviour from a decision to list offshore, similarly, it is not decisive for domestic economic growth whether productive assets in the economy are owned by residents or foreigners. If the offshore listings lead to greater investment activity in the domestic economy, economic growth would be inevitable. Conversely, a slowdown in investment activity in response to the offshore listings would dampen the economic growth prospects. The regrettable fact, though, is that the majority of companies that moved to London have over the years reduced their level of investment activity in South Africa.
Back to the issue of dividend outflows. It is important to point out that before their offshore primary listings, each of the companies had non-resident shareholding below 20 percent. Today, the SA foreign ownership of these companies is in the majority.
Therein lies the long-term problem for the integrity of our current account. Whereas the capital inflows that resulted from the offshore listings may have assisted the Reserve Bank to reduce its net open position in US dollars by purchasing dollars in the open market, in recent times these wholly or majority-owned subsidiaries of LSE-listed companies are the net payers of annuities (dividends) from South Africa to their London-listed parent companies.
The shortfall of cross-border dividends received relative to dividends paid has widened over the years. The shortfall increased from R3.3bn in 1998 to R20.2bn in 2001 – a whopping sevenfold. This was largely attributable to the offshore listings. In actual fact, the aggregate shortfalls on dividends among the five companies increased from R453 million in 1998 to R7.1bn in 2001, a 16-fold increase. I’m certain that such dividend shortfalls have widened over the years.
If we look at the impact on the country’s gross national income, which takes into consideration the primary income receivable and payable by resident units to non-resident units, such as dividends, interest and payments to expatriates and migrant workers, a true picture of the financial impact of offshore listings on the national economy emerges.
In 2000, for example, the offshore listings reduced the country’s gross national income by half a percent.
Whereas it can be argued that the offshore listings might have contributed to stronger performance in the South African domestic economy, it stands to reason that they encouraged the inward movement of capital into the economy as non-residents sought greater exposure to these companies. This undoubtedly raised the market capitalisation of the JSE and total wealth of South African residents, thus strengthening investment and consumption.
It must be noted that there are South African supergiants with extensive international operations that have chosen to remain domiciled in South Africa. Perhaps it was overall not wise to allow some of our best companies to move their primary listings to London.
- Zungu is spokesman for the Black Business Council.