Leading Jersey-based investment house Ashburton has joined the chorus of offshore watchers of the South African economy who expect Minister of Finance Trevor Manuel to announce a significant relaxation in foreign-exchange controls during his Budget speech.
Ashburton’s Global Investment Strategist, Peter Lucas, says there is no doubt that such an announcement would have a positive impact on offshore investor perceptions.
“The confidence behind the move will be a reassuring signal to potential foreign investors, particularly those who may still be a little troubled by some of the country’s foreign direct investment inhibitors, such as the relative scarcity of skilled labour, intrusive labour regulations and crime,” says Lucas.
“Whatever the announcement may be, consistency and stability are key prerequisites for foreign investors and, given rising expectations of some sort of announcement offshore, it is important that the minister give some clear insight as to the government’s intentions in this regard.”
He doubts, however, that such an announcement would result in a major outflow of investment capital from the country.
“The strong performances of the South African economy in recent years, together with the robust performance of the local property and equity markets, are likely to mitigate against this.”
While Lucas believes that a relaxation of the foreign-exchange controls would be good news for the rand, he believes any strong upside in its valuation would be countered by its recent period of strengthening and a less rand-friendly and weaker global economy in 2006. This would result in higher volatility and a correction in commodity prices, including gold.
Recalling the United Kingdom’s experience with the abolition of foreign-exchange controls in the Sixties, Lucas notes that the soaring oil price at the time produced a strong pound that crucified British industry, from an export perspective, for some time.
“Strong commodity prices down the line could do the same for the rand and usher in even tougher market conditions for South African exporters. There can be no back tracking on FX [foreign-exchange] controls should this occur, as the resulting uncertainty would frighten away foreign investors for many years to come,” says Lucas.
“Lifting or relaxing FX controls must be seen as a permanent move if it is to have the desired long-term effect on foreign investor confidence,” he notes. — I-Net Bridge