Pretoria - South
Africa first introduced exchange control in 1939 in the form of the emergency
finance regulations. Major strides have been made, especially post 1994 to
relax, to simplify and streamline exchange control regulations.
However, a
recurring question is why the country has retained a set of rules and
regulations which regulate the flow of capital in and out of the country in a
time of peace and relative low financial threats.
Exchange controls
the inflow and outflow of local currency and other local assets. They are
mainly imposed to control outflows and to preserve foreign currency reserves.
Andrew Wellsted,
head of tax at Norton Rose Fulbright, believes it has been retained in South
Africa partly for legacy reasons, but predominantly because there is still a
fear that there could be “large and uncontrolled” cash flows out of the country
if it is suddenly withdrawn.
Finance Minister
Pravin Gordhan will deliver the 2017 Budget on 22 February. Wellsted says there
may still be an announcement relating to the export of intellectual property.
Some of the major
changes since 1995 include the increase of an annual foreign capital allowance
to R10 million and an additional discretionary allowance of R1m for
individuals.
Carwyn Rhode, Standard
Bank’s senior exchange control expert, says amendments to exchange control
regulations for companies and institutional investors have been “substantial”
over the last decade.
These amendments include
allowing South African companies to make foreign direct investments up to R1 billion
per company, per year. International headquarter companies who meet prescribed
shareholding and asset criteria are allowed to invest offshore without
restrictions.
Listed and
unlisted companies are allowed to establish one subsidiary to hold African and
offshore operations which will not be subject to any exchange control
restrictions.
Since 2013, companies
listed on the JSE were allowed to secondary list on foreign exchanges to
facilitate both local and offshore foreign direct investment expansions.
According to the
South African Reserve Bank (SARB) website unlisted technology, media,
telecommunications, exploration and other research and development companies
may apply for approval for a primary offshore listing, or to raise foreign
loans and capital for their operations since 2014.
Rhode says the
positive side of retaining exchange controls is the ability to protect the
country from crises such as the 2008 US prime mortgage crisis which left many
other banks – incorporated globally – reeling from the losses incurred.
The negative side
is that South Africa is viewed as protecting its income and labour force from
external competitors and inadvertently becoming less competitive.
Wellsted says the
benefits of retaining exchange control is to keep control over capital flows,
something which regulators generally like.
“The downside is
regulatory barriers to cross border cash flows. Foreign investors, in
particular, struggle with the concept. It is a hurdle to investing in South
Africa as people are scared it means their investments may be trapped,” Wellsted
says.
Rhode says one of
the concerns about scrapping exchange controls is that it will open up the
foreign exchange market to various players, increasing the risk of unfair
market practices such as foreign exchange rate riggings.
Rhode adds the recently
introduced Currency and Exchanges Manuals setting out what is allowed and what
not in terms of foreign exchanges for banks, companies and individuals have “liberalised”
South Africans from previous rules and regulations.
These manuals were
only introduced in August last year. It will require time to become accustomed
to the changes, he says.
Only then it will
become clear if the changes have been positive or negative for South Africa,
its businesses and its people.
Wellsted says the
ideal will be to move to a reporting of transactions, rather than pre-approval.
“However, in these volatile economic and political times, it is unlikely they
(National Treasury) will significantly relax controls further.”
According to Keith
Engel, CEO of the South African Institute of Tax Professionals, the big remaining
issue is how to further liberalise exchange control for South African
multinationals to make them more competitive globally.
South African
multinationals still need exchange control approval in order to shift local
funds for investment into new offshore opportunities or to grow pre-existing
ones.
“Cross-border
loans also remain a problem. Even South African subsidiaries of foreign
companies face challenges when seeking to repatriate funds back to their home
countries through mechanisms other than straight dividends such as share
buy-backs.”
Government has
held back on further exchange control liberalisation out of fear that it could
inadvertently allow South African multinationals to shift their headquarters
into other locations.
Hence, a
“go-slow" approach has been adopted to ensure that openings are not
created that could lead to a sudden outflow.
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