S.Africa eases exchange controls to offset inflows

Wednesday, 15 December 2010 00:01 - - {{hitsCtrl.values.hits}}

JOHANNESBURG (Reuters) - South Africa has eased exchange controls further to let local institutions invest more abroad in an attempt to offset a surge in foreign inflows which have strengthened the rand.

But analysts saw limited immediate rand impact from the 5 percentage point rise in the amount institutional investors can take offshore, announced by Treasury late on Monday “as part of a package of measures to respond to surging portfolio inflows”.

The rand is up nearly 30 percent against the dollar since early 2009 as investors seek higher yields in emerging economies such as South Africa, putting pressure on government for steps to stop currency strength harming business and costing jobs.

“A move by government to free up offshore opportunities for South African money is likely an attempt to ease appreciation pressure on the rand by generating more two-way flows,” said Absa Capital in a note.

“The increased prudential limits, in our view, are unlikely to generate any significant depreciation pressure on the currency, in our view, given that many fund managers in South African have not used their existing limits.”

The new limits will allow different types of institutions to take between 25 and 35 percent of assets abroad.

“Current analysis shows that a number of institutions, in particular retirement funds, representing a significant portion of the industry investable assets, could be constrained by the current prudential foreign asset limit,” Treasury said.

“The prudential approach to regulating foreign exposure aims to manage and encourage two-way flows of capital, whilst allowing a small, open economy such as South Africa, to respond to external shocks with appropriate policy instruments.”

GRADUAL EASING

South Africa has gradually eased exchange controls in recent years and announced its intention of relaxing them further in its medium-term budget statement in October. Reserve Bank spokesperson Hlengani Mathebula said further details of the measures would be released “in the next few days”.

Inflows into the bond market have tripled this year, compared with last year, pushing the rand to levels around 6.85 to the dollar. The rand was a touch stronger on Tuesday after news of the policy change.

The strong rand has hurt exports by making them less competitive and the manufacturing sector has shed thousands of jobs -- prompting demands from union allies of the ruling African National Congress to demand a weaker rand.

But the government has taken no drastic steps to weaken the currency.

In September, the ANC rejected the idea of introducing a tax on foreign inflows and the government has opted to support the Reserve Bank to build reserves, which rose to $43.351 billion by the end of November.

Economic Development Minister Ebrahim Patel has a plan to weaken the rand by cutting interest rates, but it is seen as unlikely to gain support in government and would not increase competitiveness.