New era dawns for local investors
The easing of exchange controls takes us one step closer to the global village, writes LEIGH ROBERTS
The great excitement of this year's Budget was provided by the relaxation of exchange control restrictions on individuals.
Finance Minister Trevor Manuel outlined the relief measures in his Budget speech, but he did not reveal any of the finer details.
The ins and outs of the proposals - like how much we can invest overseas, the procedures, and whether there are restrictions on overseas assets - are still not known.
The details will probably be announced by the Reserve Bank sometime before July 1, the latest date for the relaxation. It is believed that consideration will be given to International Monetary Fund reporting requirements, the tax implications of overseas income, the preparedness of local banks and their foreign asset holdings.
The measures affect individuals in a number of ways:
Since the announcement there has been much speculation on the finer details. An informed source says its unlikely that there'll be any restrictions on the types of overseas assets an individual can invest in. This means freedom to invest in property, shares, unit trust funds, bank savings accounts and more.
As to the limit on the amount of capital that can be invested offshore, its unlikely that this will be less than R80 000. The capital limit will probably be a once-off ceiling, rather than an annual limit (like the travel allowance) for each individual.
Manuel included an important caveat with the announced relaxation: individuals and businesses will only be allowed to remit or invest funds offshore if their tax affairs are in order.
The local banks and authorised forex dealers will be given the administrative task of ensuring that a potential overseas investor "is in good standing".
This implies that all foreign investment will have to be directed through a local bank or financial institution.
Tax numbers will be used to police the capital limits imposed on individual investors.
Since the announcement some local banks have been quick off the mark by advertising their foreign currency bank accounts.
First National Bank is offering two types of deposits, call and term, in the major currencies. Standard Bank is offering foreign currency investments.
Investec will offer you a term or call deposit in your choice of US dollars, pounds, Deutsche marks, Swiss francs or yens. Its offshore global unit trust funds are also up for grabs.
FNB's John Muggeridge says the interest income an investor earns on his deposit will be retained in the foreign currency. The rate of interest will be related to the currency of the deposit. The current market rate on US dollars, for instance, is around 5%.
Of course, the flip side of the foreign coin to the local investor is the capital gain or loss on your investment if and when you convert it back into rands. So if you invest in a currency which weakens against the rand (if there are any) you will take a capital knock.
Muggeridge says more conservative investors who want some foreign asset exposure, but with the security of a bank account, and people who want to hedge against future foreign commitments such as an imminent overseas trip are likely to opt for the foreign currency local bank accounts.
The local branch of international unit trust management company Templeton Asset Management has also been quick to advertise its wares to local investors. John Phillips, the chief executive officer, says Templeton has been waiting for two years for the news of the relaxation of controls on individuals: "It's a profound step and takes South Africa one step closer to the global village. It's positive that individual investors now have the same rights as the institutions."
The question many investors may be asking is what exactly are the benefits of investing overseas? The obvious benefit is that it affords you the opportunity to lower the overall risk of your suite of assets through geographical diversification (not investing all your wealth in the fate of one nation.)
Then there's the currency risk of holding your wealth in a weakening currency. How much of your wealth should be invested offshore? One the world's richest investors, Sir John Templeton, says no more than half.