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Investors are disinvesting in South Africa, taking billions of rands out of the country; however, the amounts have been overblown, economists say, and the trend is not that unusual.
Data from the Johannesburg Stock Exchange (JSE) shows that non-residents disinvested R427 billion in the country from January to September 2023.
This includes bonds of R312 billion and equities of R116 billion – equating to monthly outflows of R26 billion per month.
However, according to RMB Chief Economist and Head of Research Isaah Mhlanga, the JSE’s data on non-resident investment flows doesn’t align with other sources.
Looking at data from the Institute of International Finance (IIF) to view capital flows in and out of South Africa, non-resident investors were net buyers of $2.0 billion (R37 billion) of South African bonds year-to-date, differing significantly from the $17 billion (R312 billion) outflows from the JSE.
Although non-residents were net sellers of $0.8 billion (R14 billion) worth of equities, this is still substantially less than the $6.3 billion (R116 billion) stated by the JSE, he said.
“There are several observations if one looks at IIF data. First, non-residents’ disinvestment from South Africa is not evident from bonds but is evident on the equity side,” Mhlanga said.
“Second, the foreign investors’ disinvestment narrative seems to have been overblown; the figures from the IIF are not as large as the JSE figures.”
“Third, South Africa is not unique nor an outlier, in fact, it is in the middle of the pack among countries that have seen inflows into their bond markets (Figure 3) and among countries that have seen outflows from their equity markets (Figure 4).”
Moving offshore
In addition, the share of offshore assets held by South African investors may be overstated, he said.
Data from the South African Reserve Bank (SARB) showed that institutional investors’ assets under management (AUM) grew from R13 trillion in Q1 2022 to R13.6 trillion in Q1 2023.
If private funds have remained unchanged from Q1 2022 to Q2 2023, there has been an R886 billion increase in AUM.
The stock of offshore assets grew from R3.4 trillion (25% of total AUM) in Q1 2023 to R3.6 trillion (26% of AUM) in Q2 2023. All institutional investors, except private funds, increased their share of offshore assets.
“Combined, between Q1 2022 and Q1 2023, total institutional investors’ (including private funds) stock of assets increased by R366 billion, and from Q1 2022 to Q2 2023, the stock of assets rose by R546 billion,” Mhlanga said.
“The USD/ZAR weakened by 22% between Q1 2022 and Q1 2023 and has remained relatively unchanged by Q2 2023.”
“There is, therefore, revaluation influence in the stock of domestic institutional investors’ offshore assets,” he said.
Problem on the horizon
Following the increase of the upper limit of foreign exposure from 30% to 45% as per Regulation 28 of the Pension Fund Act, most institutional investors, except private funds, have increased their offshore exposure, with 46% of outflows coming from unit trusts.
Although greater offshore exposure reduces risk and has the potential to increase investment returns, there is a major issue with the concept.
Capital outflows take away investment funds that could be crucial for South Africa’s infrastructure, economic growth, job creation and addressing the nation’s societal problems, the economist said.
However, the infrastructure has to be attractive for the investors, as many do invest as long as the risk-return trade-offs make sense.
“It is, therefore, up to those who must make infrastructure investments attractive to do the necessary reforms that will make this asset class attractive — investors are likely to redirect capital if it makes investment sense for the benefit of members,” Mhlanga said.
That said, with additional room to increase investment offshore, the local economy could still suffer.
“Using historical utilisation rates of different institutional investors, a 30% offshore exposure (2Q23 exposure is 26%) would have translated into R616 billion outflows of capital, relative to Q4 2021 (before offshore limits were lifted to 45% by Q1 2022) exposure, assuming no revaluation effects (Table 1),” Mhalnga said.
“This compares relatively well with the R565 billion outflows we have seen since Q1 2022, suggesting that institutional investors are still following similar utilisation rates as they did before.”
“If this holds, it implies that more capital outflows are still to take place as institutional investors increase their exposure towards 45%, which would mean a still weaker rand for the foreseeable future.”
Read: Key moment for the rand next week: economist
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