All Weather Capital strategy consultant Nick van Rensburg said the recent increase in Regulation 28 offshore limits has had a number of unintended yet harmful consequences for South Africa’s economy.
In February 2022, Regulation 28 changes came into effect that allowed South African retirement savings funds to increase their offshore allocation from 30% to 45%.
Van Rensburg told MoneywebNow that one of the outcomes of this change has been a weakening of the rand.
The outflow of money from South Africa has put downward pressure on the rand, which has made imports more expensive and contributed to inflation.
“At the time when the regulations came out, the rand was trading around R15/USD, and it’s now around R19/USD,” he said.
“So we’ve lost about 25% of the value. And because the numbers are so big, we estimate the loss could be up to R800 billion, which is very large in the context of a R7 trillion economy.”
He said this negatively affects South African citizens through higher import inflation. Food and energy, for example, are dollar-priced assets. A weak rand, therefore, results in higher food and fuel prices.
This becomes particularly prevalent in the context of a country undergoing load-shedding, as Eskom is importing a record amount of diesel.
“At the same time, we are going through a capex cycle in South Africa where the private sector’s investing very heavily in diversifying energy sources, so we are importing solar panels and batteries, and we are doing that with the weaker rand,” he said.
Van Rensburg said the changes have also shrunk the country’s asset management industry.
As asset managers focus more on offshore investments, they are reducing their exposure to South African assets. This shrinks the asset management industry and reduces liquidity on the JSE.
“The exchanges are definitely [becoming] far less liquid than they were. And we are obviously still in the process of the sell-down because a lot of the South African institutions aren’t fully at their 45% limit,” he said.
“So current liquidity still overstates the end situation, which is why we do need to stop this process and reverse it.”
This also affected the valuation of South African, JSE-listed companies.
Van Rensburg used Sasol as an example. He said Sasol is currently trading at under R250 per share but should be trading at around R325 per share “if you look at the correlation it had with the ZAR oil price”.
“So just there alone, there’s a 25% loss to anyone who owns Sasol. When the pool was larger, it would’ve traded much closer to, let’s say, the fair value.”
“We see that the valuations come lower in any of the kind of companies that can be duplicated offshore.”
In addition, he explained that the weaker rand and reduced demand for local assets are pushing up the cost of capital for South African businesses, making it more expensive for them to borrow money and grow.
This does not only affect large South African companies. Small-cap stocks are particularly vulnerable to the negative effects of the increased offshore limits, as they are more reliant on local investors.
He said the increased offshore allowance has also affected the sales of long-term government bonds, which impacts the government’s income.
“The government is trying to raise more funds. We need more bond money in South Africa,” he said.
Looking at the bid-to-cover ratios at government bond tenders, there is lower demand for longer-term bonds.
This negatively affects the government and taxpayers by raising the interest charge to the government, which taxpayers eventually have to pay via tax.
“So it just feels to us that, at the moment, the net effect of this is broadly negative,” he said.
While diversification in investment portfolios is undoubtedly good, the increased offshore allowance suppresses the value of the 55% remaining in South Africa.
Van Rensburg suggested that the government reconsider this policy and take steps to support the South African economy and investors.