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South African Reserve Bank deputy governor and chief executive of the Prudential Authority Kuben Naidoo has explained the central bank’s motives in limiting capital outflows from South Africa.
In an opinion column on BusinessDay, Naidoo said that South Africa is a small, open economy with a low savings rate, and is therefore significantly reliant on foreign savings to help finance its growth.
“The country has no controls or limits on foreigners bringing in or taking out money from the country, as long as they do so within the law,” he said.
“We do have several restrictions on South African individuals, corporates and institutional investors, which have been gradually relaxed over the years, with due prudence at every step.”
Naidoo said that there are good reasons to have some prudential limitations on capital leaving the country, especially savings in retirement funds and the reserves of insurance companies.
“Pensioners save to fund future consumption in South Africa. Insurance companies accumulate liabilities in South Africa.
“It is only correct that regulators require retirement funds and insurance companies keep the bulk of their funds in South Africa since the bulk of their liabilities are here,” he said.
Retirement funds and other institutional savers can at present invest 30% of their funds abroad. They can also buy shares in foreign companies that have an inward listing in South Africa.
Controversy
Naidoo’s comments follow proposed changes to Regulation 28 of the Pension Funds Act, which is aimed at protecting individuals’ retirement savings through responsible fund management.
Regulation 28 stipulates how pension money can be invested by limiting equities to 75%, listed property to 25%, and overall offshore exposure to 30%.
It was therefore welcomed when an explanatory note linked to the finance minister Tito Mboweni’s mid-term budget speech stated that some inward listings of international instruments would be classified as domestic.
However, the Treasury issued a circular last week in which it effectively made a U-turn on the announcement, casting doubt on whether any changes will be made to the existing regime.
The move has been heavily criticised by some in the financial sector who believe that the reversal was made to protect some local asset managers.
Sygnia chief executive Magda Wierzycka said that a group of large asset managers are to blame for Treasury’s decision to backtrack on allowing a higher ratio of offshore investments for pension funds.
“Basically a handful of large asset managers who control the wealth of most South African investors have seemingly appointed themselves the custodians of all decisions relating to foreign investments, thereby disempowering the boards of trustees, actuaries, investment consultants, financial advisers, and average South Africans from making the decisions the very legislation they reference bestowed upon them,” she said.
“It is not up to asset managers to determine the degree of foreign exposure appropriate for a particular investor: asset managers do not have insight into their clients’ liabilities, and it is up to an individual or board of trustees, supported by advisors who can help devise a customised strategy for each investor based on their circumstances, to do so.”
Naidoo said it is clear from the sector’s response that some players in the financial sector could benefit, or lose substantial amounts of money through such changes to these regulations.
He said that this is not uncommon and that it is the role of the Reserve Bank, Financial Sector Conduct Authority and National Treasury to act neutrally, without fear or favour, in the best interests of South African savers and the resilience of the country’s financial system.
“However, we do expect better from regulated entities when they raise their concerns or criticisms; that they do not undermine the regulatory process and regulators. Twitter is not a forum for complex public policy debate.”
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