Exchange controls moves open doors for SA investors

Carl Liebenberg, head of Dunvegan Wealth Management, wrote to his clients last week advising them that it was 80 percent certain that exchange controls would be abolished. As it turned out, they weren't abolished but rather substantially relaxed.

But Liebenberg says the relaxation, in substance, marks the end of exchange controls for most individuals in South Africa.

His advice to clients now is: "Don't wait until the interest rates are cut before you make your move!" He says there are "very interesting" investment opportunities abroad.

"The current exchange rate allows an unprecedented opportunity to diversify abroad, reducing the overall risk of your portfolios," says Liebenberg.

Another analyst notes that higher amounts allowed now reduce the overall cost of administering offshore trusts, while the vehicle is also gaining in appeal due to the strong rand and depressed offshore equity and other asset prices.

Wealth manager from FNB Private Clients, Larry Masson, says that even at the previous four million rand increase per person in a lifetime, there were concerns about the impact of costs. So the new change opens up far more opportunities.

"This change gives us a lot of opportunity to offer the best advice. It is the right thing at the right time," he says. However, he cautions that local investors need to move in a timely fashion when the rand strengthens, as they don't have a good reputation in this regard.

In two giant leaps to free up South Africa's economy and weaken the rand National Treasury announced on Wednesday that it is upping exchange control limits on individuals to R4 million a year from a previous lifetime R4 million and releasing emigrants' blocked assets without any exit levy to free those assets.

Previously, emigrants were allowed to remit up to R8 million of capital offshore upon emigration and the rest of the assets were blocked and could only be released via a 10 percent exit levy.

Treasury says this move supports reforms aimed at "curbing the excessive appreciation of the domestic currency" and would enable the transfer of emigrant assets to residents.

In addition the single discretionary allowance will be increased from R750 000 to R1 million.

Treasury has also proposed that qualifying international headquarter companies (this concept came to fruition in the recent tax laws amendments to push forward SA as a desirable, cost effective base into Africa for overseas companies) be allowed to raise and deploy capital offshore without exchange control approval.

This regime will be effective from January 1 2011, in line with the implementation date for the tax proposals.

"As can be seen from these amendments, most individuals will be able to externalise all or as much money as they wish. Admittedly one can only take R4 million per annum, but this should satisfy most investors needs," says Liebenberg.

He points out that the rand had a muted depreciation since the announcement.

"I suspect that the widely anticipated interest rate cut(s) in due course should add to this depreciation as it will narrow the interest rate differential between us and the rest of the world reducing the returns for investors taking advantage of the carry trade." This is why he is recommending smarter action in upping foreign portfolios.

The rand recently hit gains of 8 percent on the year, but that is already down to 6 percent.

However, there is opinion that SA may need to learn to live with a strong rand for longer as foreign funds are "sticking" more than expected. This is occurring as foreign portfolios up-weight their emerging market holdings.

SA investors can invest in rand-denominated unit trusts that invest in global markets as a way of global diversification, but their offshore allowance can be used to invest directly into foreign collective investment schemes. - I-Net Bridge