STUART THEOBALD: Foreign investment by South Africans is a strength

SA’s savings are heavily invested outside the country, and some think that’s a bad thing. This is wrong. It is an important source of economic resilience and should be celebrated.

Whether it is through a pension fund, insurance policy or even stockbroking account, SA investors inevitably have significant offshore exposure. Thanks to years of international expansion, companies listed on the JSE often have a substantial portion of foreign earnings.

Some, such as Richemont, are entirely foreign, while others, like Prosus, are close to it. These are in the domestic tranches of pension funds, which can also invest up to 45% of assets directly offshore. In their individual capacities, investors can freely move R1m a year offshore and R10m if they get tax clearance, quite aside from the foreign exposure in their pension funds and stockbroking accounts.

All told, it is not hard for a local investor to be almost entirely invested offshore.

That means a large part of wealth in the country is unaffected by poor local performance, which creates a source of resilience. A domestic economic downturn does not hit asset values, and that means that households do not have to curtail consumption as severely as they would otherwise. It disrupts what would be a vicious cycle — poor economic performance leading to asset price falls, leading to risk averse consumer behaviour, leading to poor economic performance. Of course, it’s not that clear-cut because the same savers often still depend on the domestic economy for their incomes. But the point is that consumption spending, a large part of economic activity, is more resilient than if wealth was tied to SA assets.

This is a mature feature of the postapartheid economy. In late apartheid the economy relied almost entirely on domestic savings for investment, and the two were locked in a death spiral.

The remarkable reintegration of SA in the world economy in the 1990s led initially to a flood of foreign investment, and then, as exchange controls relaxed and companies were allowed to invest offshore — some even raising capital in foreign markets — SA residents increasingly became owners of foreign assets. That balancing of flows kept the rand weaker, supporting domestic competitiveness.

The Reserve Bank tracks foreign investments in SA and local investors’ exposure abroad. Its data shows that the balance tipped in favour of SA holdings abroad in 2015, a year that saw the rand depreciate rapidly, which helps the balance even if there are no notable flows. It has since held firm.

The most recent data, for the third quarter of 2023, shows the net position is just shy of R2-trillion, or 28% of GDP, with SA investors holding R10-trillion of foreign assets while foreigners hold R8-trillion of SA assets. To get an idea of the scale, consider that the entire domestic banking system holds R5.6-trillion in deposits.

There are some people in policy circles with a nationalist investment streak who think this is a bad thing. They want policies, such as the institutional investment limits that apply to pension funds and insurers, to be changed to force more domestic investment. The assumption, I suppose, is that doing this is positive for economic growth as it will stimulate domestic investment.

But such an assumption must be tested. The high exposure to offshore economies, which are expected to grow 3.1% on average this year against SA growth of just 1.6%, helps consumer confidence. A change in policy to direct more savings into the domestic economy will damage domestic expenditure, an effect that may outweigh the effect of an investment increase.

Even more importantly, since SA capital is seeking the highest return across the world means it is growing faster than it would otherwise. Savings do eventually turn into expenditure, when people retire or otherwise dip into their savings (leaving aside emigration, which happens anyway). That returns have been maximised means that expenditure is maximised, delivering a greater economic impact. Forcing savers into domestic assets, as was done during apartheid through the prescribed assets regime, merely amounts to a tax on savers that ultimately reduces consumption, with no obvious economic benefit.

None of this means that SA assets should not compete for investment. If the returns justify it, I expect you will find SA investors will quickly shift portfolios into more domestic exposure. This, too, is an important positive of the net investment position — we are much less reliant on volatile foreign investors. Global economic conditions can quickly lead foreign portfolio investors to sell, but SA investors are more likely to be responsive to domestic conditions. This diversity of motivations for cross-border investment means there is less volatility in portfolio flows into and out of the country than there would be otherwise.

I would certainly like to see more investment in SA, by domestic and foreign investors. But it must be a result of the relative attractiveness of returns. Forcing it through regulatory fiat is likely to backfire, damaging confidence and the many other benefits from our net investment position.