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FOREIGN investors often forget about exchange controls, unencumbered by them in day-to-day investing in South Africa. However, local institutional investors (and individuals) have to stick to the 20%+5% rule, which is the offshore prudential limit.
This is 20% in any offshore assets with an extra 5% for any additional African assets. ZAR weakness increases the (ZAR-denominated) offshore asset share in a portfolio. USDZAR has moved 42% higher since end-2014 and is 18.6% stronger since end-September to present. These moves clearly risk pushing institutional and individual portfolios over their prudential limits.
Investors have one year to repatriate funds to bring themselves under the offshore limit. So they have a choice when they can do so, and if they believe the ZAR will weaken further they will do so towards the end of that one-year window – or indeed vice versa.
Of note, the offshore limit is applicable to individuals and funds, and for funds this means on an individual mandate level (though some funds can be designated offshore funds separately with additional reporting requirements on who is investing in them). The difficulty is finding where the system is currently at vs the limit, and then ascertaining the sums involved.
The SARB has now reminded institutional investors to keep below their prudential offshore limits and has said it will undertake additional monitoring and require quarterly reporting from funds that breach the limit on how they will move back within the limit in the required time frame.
The market is interested in the issue because it is a ZAR-supportive flow. We have three ways of looking at this issue:
• Using bottom-up ASISA data, we find that overall the system in the institutional fund space has around 16.8% investments offshore. There are some issues of coverage and some prospects of foreign money being invested in funds that are not subject to the limit. However, this is the most comprehensive database available.
- The system overall is therefore within the limit. The ZAR move since end-September means the offshore share would increase to 19.3%, and would still be within the limit.
- This shows the problem is more contained in individual funds. The data point to multi-asset funds being most at risk with 23.9% offshore at end-September. With the ZAR move to present (and assuming no foreign asset selling so far) this would take the offshore level to 27.2%. That equates to repatriation requirements (so far) of USD1.1bn.
• A bottom-up estimate of a small sample of the very largest multi-asset and lifestyle funds locally suggests repatriation requirements for the whole system of some USD1-2bn.
• The SARB’s quarterly bulletin international investment position data for end-2014 can be updated to end-Q3 2015 using quarterly flows, and then to the present with the ZAR move. These show total offshore portfolio assets of the non-bank, non-government sector of USD12.9bn at end-September.
If one assumes the system was at its limit at that point (25% offshore), it would imply the maximum repatriation flow (given the offshore share would increase to 32.2%) would be USD4bn currently. However, as the ASISA data show above the overall share that is offshore is already lower. This USD4bn therefore needs to be multiplied by the proportion of funds that were just below (more than 19%) or above the offshore limit in September which should be low. The ASISA data suggest around half of all assets under management were in segments or investment styles of funds that might fall into this category. So again we come up with something like USD2bn maximum.
Spread over a year, we do not think USD1-2bn levels will have much impact on ZAR because of other factors such as the terms-of-trade shock and FDI outflows (Chevron is selling up its stake in its local subsidiary, Barclays is possibly selling a significant portion of its stake in ABSA, which in total is about USD4bn).
However, as we expect ZAR to depreciate further (to 19.0 end year in USDZAR) this will mean funds are at further risk through this year. However, the key offsetting factor is funds and particularly individual investors that are currently well below their offshore limits and are expected to send more money offshore, using up more of their limits this year. These kinds of flows from the ASISA data and IIP data would suggest outflows in the region of USD2-4bn from local savers are possible.
Add in outflows from foreign investors in the bonds and equity markets which have been around USD1bn year to date or USD1.7bn since end-November.
The point we are trying to make is that flows will be going in both directions, and repatriation flows (and FDI flows) will be spread out over time. We therefore see repatriation flows as key to smoothing ZAR volatility and soothing ZAR sentiment within a broader sell-off as opposed to reversing it.
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