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In February 2022 the finance minister announced changes to Regulation 28 of the Pension Fund Act, and an increase in the offshore limit for pension funds to 45% from 35%. At the time, the Treasury’s borrowing requirement was increasing and funding conditions were worsening.

Allowing more domestic savings to flow out seemed counter to the Treasury’s own interest and made little sense. Yet the change to Regulation 28 was accompanied by easing of restrictions for offshore investment by individuals.

This was in line with an approach the Treasury adopted in the 2000s that favoured external account liberalisation. In the decade to 2015 South Africans increasingly invested offshore, but offshore investors also brought money into SA.

SA Reserve Bank data shows that SA was a net consumer of capital amounting to about 15% of GDP in the years to 2012. This situation reversed and SA became a net exporter of capital from 2016. By December 2022 SA net lent 20% of GDP to the rest of the world, driven by net external investment of individuals, fund managers and corporates.

On the fund management side SA was a net recipient of foreign capital up to 2017, but capital has since flowed out. The world now owes SA more money than the country owes it. It matters a lot.

In 2022 during the Lady R drama, the rand seemed in free fall. The currency seemed to settle before it could get to the levels suggested by past crises. I thought it could go to R21 to the dollar, but it settled some way below that at about R20, and then reversed. The currency has traded in a range against the dollar ever since.

When the rand came under pressure, local investors saw the value of their holdings appreciate in rand terms and cashed in. Moreover, because so many funds are at their offshore limits, rand depreciation increases the value of their offshore holdings and they are forced to reduce these holdings, and thus buy rand.

Premiums dropped

Rand holdings of offshore assets stood at R3.5-trillion in December 2022. A 5% depreciation in the rand, which the currency typically does intramonth when we consider it range trading, equates to R150bn, or a more than two percentage points of GDP change in value. This is a mammoth potential inflow and illustrates why it will now take a lot for the rand to sell off.

We have started to observe something interesting in the markets. Option premiums, the costs of insuring against currency volatility, have dropped. More interesting, the cost of insuring against rand weakness relative to rand strength has fallen. This suggests market participants think the probability of rand weakness has fallen.

Alternatively, there is more need to insure against rand strength, which is a position that would be held by local investors in offshore markets who want to keep the value of their offshore holdings in rand. If I have $1 in assets worth R18.90, I lose money if the rand strengthens and want to protect myself against it. This fall in the option premium for weakness protection also illustrates this point.

There is a related dynamic, which is that offshore investors no longer hold as many assets in our market as they once did. SA is the cheap market everyone loves to hate. The lack of growth explains this, and the reasons are well discussed. However, SA assets are underowned by local and offshore investors, and they are cheap.

The potential upside to structural reforms is high and investors are circling, looking for a constructive narrative to emerge. So from the local side, investors cannot sell any more. From offshore, investors have sold what they wanted to.

This is not to suggest positions in SA couldn’t lighten further; the country could be a value trap. However, it does suggest that the hurdle for a further sustained sell-off in rand is high. This is the hidden benefit of having assets outside SA.

• Lijane is global markets strategist at Standard Bank CIB

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