Finance Minister Pravin Gordhan announced in the Medium Term Budget Policy Statement (MTBPS) that exchange control measures would be relaxed.

In what is called the biggest forex control relaxation in a decade, the minister doubled Individuals’ foreign capital allowance from R2-million to R4-million, increased the single discretionary allowance from R500, 000 to R750, 000 and raised the ceiling for foreign corporate investment without specific central bank approval tenfold to R500-million.

With the ZAR still at a favourable level for outward investment this has created a limited window of opportunity for South African investors looking to move money offshore, especially for those who have already used their R2-million allowance but wish to take advantage of the strong ZAR.

This window will be limited however as most Forex experts agree that most of the measures announced, e.g. increasing the limits on off-shore investment, are apparently aimed at trying to weaken the ZAR.

Much of the ZAR strength in recent months stemmed from the sale of financial assets to foreigners who received a high yield on their investment locally. Considering the high interest rate in SA compared to other countries in the world (0.5% in the UK) it's not surprising that investors with a higher risk appetite would look at SA for good return on their cash.

However, this influx of money into South Africa strengthens the rand, which in turn makes it very difficult for our exporters to keep their heads above water in difficult economic conditions.

Many economists believe the poor performance of, in particular, mining, manufacturing, tourism and agriculture, but also indirectly retail sales, can largely be attributed to an overvalued currency.

By relaxing exchange controls for both businesses and individuals the government hopes to reduce the cost of doing business in South Africa and encourage investment abroad. This will serve as a countermeasure against the foreign inward investment.

We have already seen the ZAR weaken significantly on the back of this decision but whether this short term move is sustainable remains to be seen. The initial reaction was a sharp drop in the ZAR but we have seen the market stabilise as it digests the full Budget Speech and the implications thereof.

Whether South African companies and individuals will oblige by utilising these new concessions is a different matter. Nevertheless, the Bank has made its intentions of weakening the currency pretty clear and those with a spare ‘mil’ or two would be well advised to act quickly.

Wishing you health, wealth and happiness,

Mike Smuts
Property investor and MD of Smuts & Taylor.