JOHANNESBURG - South African asset flows into international investments will slow to a trickle this year because of new regulations that severely restrict the ability of local pension plans to invest offshore.
Last month, South African Finance Minister Trevor Manuel announced that South African pension and mutual funds each year would be allowed to invest offshore only 10% of their previous year's net inflows. Inflows comprise investment income and contributions.
The move followed Mr. Manuel's abolition of the asset swap, a mechanism South African institutions had used to invest offshore. Under an asset swap, a South African institution had to match its international investments with an investment in the South African market by an offshore institution.
The new restrictions are likely to make international money managers think twice before setting up operations in South Africa. "If they do come here, it will be a question of taking existing business from established money managers. The pool of money to invest offshore will probably be static," said Mark Samuelson, head of South African institutional business at Investec Asset Management Ltd., Cape Town.
Pension plan executives and money managers welcomed the abolition of the asset swap but were surprised and dismayed by the restriction linking investments to previous inflows.
The move is a particular blow for mature pension plans with net outflows, and for plans that have not yet invested offshore. Institutions that are significantly underweight in their offshore investments could be seriously disadvantaged and could see their investment risk increase, said Rael Gordon, managing director of Investment Solutions Ltd., Johannesburg.
Under the new arrangement, South African pension plans will be able to invest offshore only about 5 billion rand ($647 million) this year, according to Kevin Lings, an economist at J.P. Morgan Securities Ltd., Johannesburg. This compares with around 25 billion rand during 2000.
South African pension plans face a ceiling on international investments of 15% of total plan assets. Many plans already have invested up to the 15% limit in offshore assets, and the average offshore exposure by local pension plans is estimated at 13% of plan assets.
But some very large schemes were planning this year to make their first foray into international investing.
"If there is no inflow then there is no go," said Esmarie Strydom, investment manager for the Transnet Ltd., Johannesburg, pension funds, which had combined assets of 37 billion rand at the end of last year.
Around 8% of the Transnet schemes' total assets were invested offshore and the plan - which covers employees of the state railway system - was hoping to increase its international allocation this year, said Ms. Strydom.
Transnet's 20 billion rand scheme for pensioners only won't be able to invest further funds offshore, as it had no net inflows last year.
South Africa's largest pension plan, the 180 billion rand Government Employees Pension Fund, this year was expected to put a chunk of its assets in international markets. Sources close to the government said last year the GEPF had completed an asset-liability study with the intention of revamping its investments (Pensions & Investments, July 24). The fund invests only 1% of total assets offshore. Peet Maritz, chief director of the GEPF, did not return calls by press time.
Lesetja Kganyago, head of economic policy and international financial relations at the National Treasury, said the GEPF still had not appointed trustees and that there was "no demand to take money offshore."
Not a reversal
Officials at the Treasury denied the new investment rules were a reversal of the government's policy of gradually easing exchange controls.
"This is not a tightening of investment restrictions at all. It remains the policy of the South African government to continue with the process of gradual relaxation of exchange control," Mr. Kganyago said.
But he said there would be no further changes to exchange controls and international investment limits until the Treasury has drawn up a framework of regulations for broader rules including international and domestic investing pension plans. He would not give a date but said they were a high priority.
"When the regulations are in place we will have to review the mechanisms in place for investing offshore," he added. Until then, the limit on international investing of 10% of previous year's net inflows would remain unchanged. He could not give details on how the regulations might look, but said they were a high priority for the Treasury.
Under the new rules, assets invested offshore through a swap no longer would have to be repatriated but could be reinvested internationally, said Mr. Kganyago.
Local money managers said it is unclear if the government intended to slow international investing by domestic institutions or whether the new arrangement was simply an unintended consequence of scrapping the asset swap.
Previously, a pension plan that already had invested internationally using an asset swap could make further direct investments offshore, within the 15% limit, but only to the tune of 10% of the previous year's net inflows.
"This is not a policy reversal. ... I just think the government badly miscalculated (the impact) on the local retirement industry," said Andre Roux, head of fixed income at Investec.
Lesley Harvey, chairwoman of the Fund Managers Association of South Africa, Johannesburg, said it is likely the government wanted to slow the pace of international investing to prevent further weakness in the local currency and keep the balance of payments in check. During 2000, the rand weakened 23.1% and 15.5% against the dollar and the euro, respectively.
Representatives of the Fund Managers Association planned to meet with Treasury Officials within the next few months to discuss the recent changes, she said.