Companies are stalling on repatriating their export earnings Mungo Soggot and David Macfarlane A leading South African economist, SG Securities Nico Czypionka, says South African companies listed offshore are maximising their returns by taking their cash flows offshore. Czypionka is referring to outflows to South African companies listed abroad, which, he says, “are a major cause of the current account deficit and significant contributors to the rands weakness”. The Reserve Bank recorded a surge in outflows in the second and third quarters of this year, which emerged from its latest quarterly bulletin. The SG Securities chief economist is one of the few economists who have cited these outflows which have risen considerably from last year as one of the key reasons for the rands weakness. In response to an article on the outflows last week in the Mail & Guardian, Anglo American one of the companies concerned said “the root causes of the rands weakness lie elsewhere”.
The company even suggested the departure of itself and others had helped the rand, because of the one-off inflows to South Africa of capital when they left.
Czypionka says it appears many of the offshore South African companies are “maximising returns stripping their cash flows through various means”. He says it appears that some companies are paying out to their offshore holding companies as much as possible and that a proportion of these outflows are transfers like management fees. Some of this money will be brought back to South Africa when it is needed. “There should be reverse flows, and export proceeds that are being held back because of rand weakness earlier this year should have already flowed back. But we are just not getting them. There are hundreds of millions of dollars missing from the equation.” In addition to the dividend outflows, companies efforts to stall the return of their export proceeds has also been cited as a key reason for rand weakness.
Czypionka says that funds brought back into South Africa now would generate weaker gains because they return at a weaker exchange rate after a long delay.
He says the exodus of money is not unlawful, and that it is natural for companies to seek to maximise their profits thus by effectively placing a safe bet on the decline of the currency. “They cant be blamed for it. In fact it is an imperative for them their money is at risk. At the moment they cant make money in South Africa, so they pull back and wait.” Czypionka says such outflows will last as long as it appears inevitable the rand will slide further, and that the only way of bringing about a reversal is for the rand to strengthen. “Once there is a strengthening there could be a gush of return flows, as companies will fear losing out on some of the gains if the rand is seen to become stronger.” In response to this situation, the government and the Reserve Bank should avoid implementing any defensive new regulations, but rather subtly adapt existing regulations on a temporary basis. Czypionka says it is crucial that any such measures be accompanied by “creative, inspiring initiatives” such as the provision of tax breaks for foreign direct investment and job-creation incentives for new foreign investors. It is facile to attribute the fall of the rand over the past year and more to “speculators” because for various reasons liquidity in the rand market has dried up. Last week the M&G reported that the main portion of a R45,8-billion deficit on the service and income account of the balance of payments was a R32,8-billion outflow of dividends. (All figures are quarterly and annualised.)
Economists say the rest of the money making up the R45,8-billion can include repatriated profits from companies, and travel allowances. Anglo American says the correct figure for the dividend outflow is R22-billion dividend payments net of receipts as some of the money referred to in the R32,8-billion figure comes back to South Africa. Another economist says while the R32,8-billion is recorded as an outflow it is debatable whether the inflow of dividends always come from abroad, or whether they originate from South Africa in the first place. Even working with the R22,5-billion figure, there has been a striking increase this year. The total for the whole of last year was R18-billion. Anglo says the rand could be in even worse shape as the inflows from it and other similar departures offshore were used by the Reserve Bank to reduce its net open forward position. The proceeds were used by the bank to wind down its net open forward position, and not put into the spot currency market one of the factors that has reduced liquidity in the market and clamped down on speculation. All sectors of the economy are bracing themselves for the impact of the rands collapse. Cristoph Kpke, CEO of DaimlerChrysler South Africa, says the major potential problem for the motor industry is a likely increase in the cost of imports, which are used in the local assembly of cars. He says the devaluation of the rand and an increase in imported inflation could be a worrying combination, citing 15% devaluation and inflation of 6% to 8% as an example of such a headache. But he said such a scenario is unlikely. “The rands value has become totally unrealistic. Market forces will bring it back down though dont ask me when.” Kpke said in such conditions motor manufacturers needed higher local content and higher exports to compensate for higher imports. He says manufacturers that have focused on exports will be all right such as German companies like Volkswagen, BMW, DaimlerChrysler, and Opel. He expects car prices to rise 12% to 16% next year.