Treasury squashes excitement over changes to foreign investment rules
- A recent Reserve Bank circular caused confusion in the investment industry.
- Some interpreted it as a key move to relax rules for pension funds to invest offshore.
- But Treasury has now moved to suspend the circular with immediate effect.
- For more articles, go to www.BusinessInsider.co.za.
Treasury has poured cold water over excited reports that retirement funds would soon be able to soon increase their holdings of overseas investments.
Earlier this month, following an announcement by finance minister Tito Mboweni, the Reserve Bank issued a circular that was interpreted – by some in the industry - as a way for pension funds to hike their international exposure.
Currently, South African retirement funds, retirement annuities and preservation funds can only invest 30% of their investments in foreign investments and a further 10% in Africa. The rest must be invested in South African assets.
The circulated stated that “all debt, derivatives and exchange-traded instruments referencing foreign assets, that are inward-listed, traded and settled in rand on South African exchanges, will be classified as domestic”.
Some industry players assumed this meant that locally-listed exchange traded funds (ETFs) that track overseas assets will now be deemed South African assets – meaning that retirement funds can effectively invest more than 30% in international shares. One economist called it “the biggest relaxation of exchange control this country has ever had”, Moneyweb reported.
But on Tuesday, in a joint statement, National Treasury, the Reserve Bank and the Financial Sector Conduct Authority (FSCA) immediately suspended the circular to “reduce the scope for ambiguity”. It said it wasn’t meant to apply to retirement funds.
One senior investment industry representative told Business Insider that it was largely assumed that government wouldn't lift foreign investment restrictions on pension funds in this way, and at this crucial time for the local economy.
But Magda Wierzycka, CEO of the fund manager Sygnia, contends the original circular was very clear in its intention, and that the Reserve Bank would not have issued it without taking all the possible implications into account.
“There would have been no purpose in issuing the circular otherwise. Institutional investors were always allowed to invest in inward listed ETFs, just within the constraints of foreign exchange limits.”
Sygnia, which has a range of exchange-traded funds that track overseas indices, would be one of the big beneficiaries if these products were effectively regarded as South African investments.
Wierzycka says there was some backlash in the industry from other fund managers who don’t offer exchange-traded funds, and that their objections and other queries may have triggered the suspension.
Treasury is now inviting stakeholders to comment on the suspended circular, and Sygnia says it will offer a comprehensive argument about why it would have a positive impact on South Africa and South African savers.
Wierzycka points out that the number of JSE-listed companies have reduced from 410 a decade ago to 341, with many too illiquid to consider realistically. Domestic companies, especially property companies (which are popular with retirement funds), have delivered pedestrian returns for years, and she believes allowing South Africans to investment more of their money – via low-cost ETFs - in fast-growing overseas companies will help the economy.
“Savers feel richer, spend more, pay more taxes, are more inclined to retain their savings in South Africa as opposed to slowly bleeding them offshore, and feel more confident that they will be able to retire in comfort,” says Wierzycka.
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