The practical effects of exchange control liberalisation depend largely on how the Reserve Bank views risk, according to tax experts.
This week, Finance Minister Trevor Manuel announced the scrapping of exchange controls for South African companies wishing to invest offshore.
However, transactions are still subject to approval by the Reserve Bank, which will consider the viability of each investment, its probable profitability and timing of payments so as not to disrupt the exchange rate market.
Exchange controls for portfolio investment remain in place. Individuals can hold up to R750 000 offshore. Pension funds can hold 15% in foreign currency- denominated assets, and collective investment schemes, 20%.
David Clegg of Ernst & Young said the timing of the move was surprising, but that the government was probably encouraged by two-and-a-half years of rand recovery, with no sign that this might be disrupted.
“[I] hope that the bank will now become less sceptical and demanding in relation to the future profits arising from proposed foreign investments.”
Clegg notes that the bank’s demand for “crisp” five-year profit forecasts are unrealistic, adding: “The bank must realise that profit generally relies on risk and substantial profit upon greater risk”.
The Reserve Bank has been cautious about major foreign exchange transactions since 2002, when the Myburgh Commission into the collapse of the rand suggested that there had been a lapse in the enforcement of exchange control regulations.
Manuel said individual limits had not yet been eased because the tax amnesty process was still under way. Applications from individuals who had illegally moved funds offshore to declare them closed on February 29.