Should we keep saving abroad?
A Fin24 reader writes:
My husband is currently working abroad and his permit expires in 2012. He will be returning to SA – would he be able to keep his bank account abroad and continue to deposit money into it as an alternative method of saving? Are there any rules and regulations we should take note of?
How would offshore investment benefit us?
Don Richter, an accredited financial planner with PSG Konsult in Houghton, responds:
Today, countries which still impose exchange controls are the exception rather than the rule.
Unfortunately South Africa is one such exception, even though exchange control regulation is much watered down from even a couple of years ago.
The main purpose of exchange control in South Africa is - and more particularly was - to prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in the country.
Fortunately the National Treasury has made significant concessions over the past few years, which allow individual taxpayers over the age of 18 and of good standing to apply for clearance to invest up to R4m per calendar year abroad.
However, seeing that your husband will be returning to South Africa and will therefore remain tax resident here, he will be required to declare any foreign reserves earned and retained in the offshore bank account within 30 days of arrival to Treasury or, more commonly, an authorised dealer.
Should your husband wish to add additional funds to this foreign investment, he will have to apply for clearance from the South African Revenue Service as stated above.
Even though the entire foreign investment application process sounds rather intimidating, in practice it isn't.
It should be noted that an offshore investment into a cash account will only really benefit you if the rand exchange rate weakens significantly, or if you earn significantly more interest in the foreign bank account.
Once you start considering the low interest rates typically earned on cash abroad or the adverse taxation once the foreign interest exceeds R3 700 per annum, then an investment into cash abroad quickly loses its appeal.
A better choice of foreign investment will arguably be in an appropriate offshore unit trust; any local financial adviser will be able to assist you in this.
My question is, will the ZAR weaken in the future. I've heard from sources that the ZAR is over-valued and will eventually be corrected.
Well now, why dont you just ask, how long is a piece of string?
Technically, yes, depending on how long into the future you are looking; presently, though, there are major forces at play, particularly with US$; China purchases billions in US bonds to strengthen the dollar and the Fed tries to keep the dollar weaker to bolster US exports; the USA may default on its debt; Foreign investment in SA is predominantly "quick flight" capital...there are many other consideration factors which makes a call on the direction of any currency extremely difficult. The opportunity with the strength of the Rand is in getting into offshore investments a lot cheaper than a couple of years ago and even more so given the current global financial turmoil...so, for now, ask not where the Rand is going; ask rather where to invest offshore.
That is the $1M question - and I don't think anyone really knows the answer to that one!
Truth be told it will never be a bad idea to leave it where it is given the uncertain political situation. You can only win but have very little to loose depanding on where it is and how it is invested.
Very often, our currency fluctuates on political news, rather than economic influences. However, long-term history shows that most African currencies (including the SAR) have depreciated against the major global currencies, ie. USD, GBP and EUR. Agreed, cash off-shore right now will earn very little compared to SA bank interest rates. Somebody here said diversify and that's correct, so it makes sense to have about 25 to 30% of one's liquid assets in offshore funds like unit trusts. But not cash in a bank - interest rates are too low right now.