Billions flooding out of South Africa

Hundreds of billions of rands have flooded out of South Africa in the past decade, with some estimates ranging as high as R1 trillion.

This will likely worsen as local investors have joined their foreign counterparts in dumping local assets for offshore alternatives. 

In its first Financial Stability Review of the year, the Reserve Bank revealed that both foreign and local investors are taking significant sums of money out of the country.

Concerningly, the latest data showed that even government bonds have not been spared from this selloff. 

Government bonds have not experienced as significant outflows as equities over the past decade, as their attractive yield has kept them globally competitive. 

However, the risk posed by the government’s massive debt pile and rising debt-servicing costs has given investors pause. 

In the first quarter of 2024, foreign investors were net sellers of R12.4 billion worth of JSE-listed bonds after net purchases of bonds to the value of R11.2 billion in the fourth quarter of 2023.

The Reserve Bank said continued outflows from the equity market were reflected in the share of non-residents’ holdings of domestic shares, which reached a new low of 27.6% at the end of March 2024. 

John Biccard, portfolio manager at Ninety One, said foreign investors had sold R710 billion worth of South African equities in the past seven years. 

The Reserve Bank warned that this poses a risk to the local financial system as South Africa’s capital markets are slowly drying up. 

Furthermore, the rise in government debt has exposed financial institutions to a single common risk and made the local financial system vulnerable to external shocks. 

The Reserve Bank’s graph below shows foreign investors’ dumping of local assets over the past five years.

Local investors joining in 

On 23 February 2022, following the National Treasury’s (NT) decision, the Reserve Bank increased the offshore prudential limit for all South African institutional investors to 45%, inclusive of the 10% Africa allowance.

This enabled all insurance, retirement and savings funds to invest 45% of their total retail assets under management outside South Africa. 

The previous limits were set at 30% or 40% for different investors, with a separate Africa allowance of up to 10%. 

While this benefits local savers by giving them access to global markets and thus better returns, it has resulted in money flooding out of South Africa. 

The average Regulation 28-compliant fund now holds just 39% of South African equities, compared to nearly 70% eighteen years ago.

This has resulted in the total offshore allocation of domestic institutional investors being equal in value to South Africa’s entire nominal GDP – more than doubling since 2012. 

The rationale for the decision was that with a shrinking economy, sustained delistings on the JSE and structurally lower economic growth, the offshore prudential limit increase should offer increased diversification to domestic investors. 

The previous increase in the offshore prudential limit for domestic institutional investors was in 2018. 

The Reserve Bank said the increase in offshore prudential limits has both positive and negative implications for financial stability. 

While it may have distributional effects on the domestic capital markets and contribute to a loss of depth and liquidity, it provides diversification opportunities and the possibility of higher earnings for domestic investors. 

As the aggregate new limit approaches, it becomes a stabilising factor as all returns that push exposures over the limit must be repatriated.

The increase in offshore allocation from local institutional investors at the expense of South African assets can be seen in the graph below.