Offshore listings, speculators and the situation in Zimbabwe have handed the currency a thrashing
Mungo Soggot
Shocking figures released by the Reserve Bank this week show that an annualised R45-billion left South Africa in the third quarter because of the major local companies that have listed offshore, exacerbating the collapse of the rand.
The figures, in the bank’s most recent quarterly bulletin, mean that an average of R3,8-billion a month has flowed out of South Africa in the first nine months of the year in the form of profits by companies that have moved their listings abroad, or in the form of dividend payments to their shareholders. In the second quarter the annualised figure which is the quarterly number converted to an annual amount was R45,8-billion, while the latest third-quarter annualised tally is R45,3-billion.
Capital outflows of that magnitude inevitably hit the currency, but the Reserve Bank has nevertheless sought to downplay the significance of this money leaving the country. At the weekend Reserve Bank Governor Tito Mboweni was quoted in Business Times as saying the outflows were not as significant as some commentators thought.
Mboweni said South Africans were generally taking out more money in their private capacity. He told Business Times: “There is evidence that more and more South Africans are taking money out of the country within the allowed limits.” Those economists who believe the outflows are crucial to explaining the rand’s weakness say the bank is in denial. “They [the migr companies] are milking the country dry,” said one.
The offshore companies are mainly based in London. They include Anglo American and Billiton, the mining houses, Dimension Data, the networking company, South African Breweries and financial services group Old Mutual.
The main reason these companies cited for permission to seek offshore listings was access to foreign capital for their expansion, arguing it would be in South Africa’s interests.
Meanwhile, foreign companies with operations in South Africa are allowed to repatriate their earnings in the form of dividends to their offshore holding company, exacerbating the strain on the currency. It has also been suggested that South African exporters have been delaying bringing their foreign earnings back to the country, betting on a decline in the currency and compounding its decline.
The Reserve Bank figures shows that dividend outflows mushroomed this year. (These are listed separately from the overall outflows referred to above, which are the country’s services and income account. The rest of the outflows include companies’ profit repatriation).
In the third quarter the tally was an annualised R32,8-billion, compared with R46,8-billion in the second quarter, and R15,2-billion in the first. The total for the whole of last year was R18-billion.
Since the initial exodus of South African companies the Department of Finance has tightened the rules.
By the end of this week the rand had lost about 30% of its value since the beginning of the year, having fallen to record lows. At the time of going to press it was R11,10 to the dollar and R15,75 to the pound.
Analysts have scrambled for explanations. There are essentially two schools of thought on the rand’s collapse: one is that it is being driven by speculators, and by a variety of political factors including the Zimbabwe effect. The other is that it is based on economic fundamentals such as the dividend outflows, the trade account moving into deficit and the reversal in November of foreign equity portfolio inflows, which have played a crucial role in buoying the rand.
Speculators effectively bet on the currency’s decline. Speculators borrow rands or assets denominated in rands, and then sell those assets in the hope that sometime in the future close to when they have to return them they will be worth less in dollars. They then pocket the margin in dollars.
The rand is particularly susceptible to such speculation, because it is so liquid. Whereas it is difficult to convert many other emerging-market currencies, the rand is easy to convert with its relatively few restrictions.
Tony Twine, of economics consultancy Econometrix, says according to a report this year by the Bank of International Settlements, the rand is the 12th highest-traded currency in the world, while its economy is ranked about 30th. “So the rand is really an international currency.”
Twine says the capital outflows related to offshore companies are significant, but adds that some of that money returns in the form of dividends to local shareholders. He says that once the companies concerned start making more profits offshore than in South Africa, the bleeding will reverse into an inflow.
Those analysts focusing on the corporate capital outflows downplay the role of speculators in the recent currency crisis. One said the amounts involved are far too large and that the Reserve Bank has in any case clamped down on speculation by obliging players to prove they have a transaction to execute before they can trade the rand. Compounding the dire scenario for the rand is that this new regulation also blocks people from punting a positive view on the rand and buying because they see it as too cheap.
Pieter Laubscher, senior economist at the Bureau for Economic Research in Stellenbosch, said he believed speculation was fuelling the current crash, but added he had no concrete proof of it and that it was unlikely to be the sole reason behind the rand’s demise.
He said the rand’s performance was a “mystery”, adding: “I would not be surprised if there is much speculation in the market … but we have no insight into why conditions are more favourable [for speculation].”
Additional reporting by Nawaal Deane