Offshore Investment in South Africa: Bottomless Pit or will the Fortunes Run Dry?

Headlines like the below have become all too familiar in the South African press and media:

“More South Africans will likely quit their jobs and emigrate in the coming months: expert” – BusinessTech, 29th January 2021.

“Everything you need to know about pursuing a new life abroad”- News 24, 31st May 2021.

A 2019 Afrobarometer survey found that the top five emigration reasons provided by South Africans were:

·      Finding better work opportunities (40%)

·      Escaping hardship (17%)

·      Finding peace and security (8%)

·      Travel and tourism (7%)

·      Entrepreneurial prospects (6%)

Source: BusinessTech

South Africans looking to start a new life elsewhere is by no means a new theme. Between 2009 and 2013, I worked for a large British bank in South Africa and I recall similar headlines back then. At the time, I often wondered if there would be an end to emigration and money flows leaving South Africa. It seems there were (and still are) two options for those looking to preserve their wealth: either move yourself or move your money out of South Africa. Many of those wishing to remain in their home country achieve the latter by investing in assets offshore which diversifies their portfolios away from local market risk to target stronger investment returns.

One of the biggest hurdles South Africa has faced in the recent past were the restrictive Exchange Controls imposed by the South African Government. These are all but gone today for the middle to upper classes in South Africa, with a R1 million annual discretionary allowance plus a R10 million foreign investment allowance. Furthermore, South Africans can make a special application to remit amounts greater than R10 million and SARB will approve in most instances

Since the loosening of these restrictions, more and more countries like Portugal and Malta are offering citizens of the world an opportunity to buy citizens’ rights. This has become a very attractive proposition in South Africa for anyone that is looking for an EU passport, job security and a safer life.

The one dynamic that has changed, in my view, is that since the mid to late 2000s the profile of the typical South African investor has altered. It was once only the sophisticated professional/institutional investor that invested offshore. By contrast, nowadays, investing part of your capital offshore is now more the norm than the exception. In fact, failing to include offshore assets as part of your portfolio is almost frowned upon and most of the financial advisers and brokers that the Capital International Group partners with actively encourage their clients to diversify by investing overseas. The main reasons for this are:

1. It gives investors access to hard currencies e.g. £ and $.  

2. Investors can tap into markets and stocks that have a much better promise of outperforming markets

3. It allows investors to escape the very narrow investor landscape and sluggish or poor performance of South African listed companies on the JSE.

Below is unofficial data reflecting money flows out of South-Africa over the last 5 years using allowances:

I recently spoke to Tim Powell from Sable International (forex and exchange control specialists) and he described what their experience had been over the last 5 years and how he sees the situation developing in the future.

“The numbers have steadily increased over the years, but one must bear in mind that one factor which really distorts these stats is the number of people that have transferred funds to take advantage of bitcoin arbitrage in the past 18 months. This number is significant; I would estimate +/- R40 billion in 2020 and more this year. This makes the increase in flows appear more dramatic than I believe they are in reality. Clients send funds offshore for the arbitrage and the funds return to SA but via a crypto exchange.

That said, it does appear that South Africans will continue to externalise funds, and one cannot see this trend reversing in the medium term. The recent riots in South Africa don’t appear to have made a dramatic increase in activity in the immediate term, although more and more South Africans are discussing their “plan B”. In fact, after a very busy year, August was particularly quiet. I believe South Africans are becoming far more astute in transferring funds offshore; no longer panicking when the Rand falls over and exercising some patience when looking for opportunities to buy into strength. There is no doubt that South Africans are also becoming more aware of the opportunities to invest in global companies and the “insurance policy” factor of holding offshore for South Africans living in their home country.”

Reflecting on the above, my personal summary is:

South Africans are now much more aware and inclined to use their foreign allowances and are looking for international markets where they can tap into a more diverse marketplace and possibly access better returns.

Demographics are also shifting. In South Africa a new middle class of savvy investors is growing, which means no slowdown in sending monies abroad.

New areas of finance like Cryptocurrencies and Crypto Assets are becoming more widespread and with investors understanding and confidence growing in these areas, we are likely to only see further monies flow.

There is currently some consolidation of smaller advisory firms which are being picked up by some of the larger firms. These more established companies are already very active in the offshore arena which will mean the client bases they acquire will possibly also be directed towards offshore.

Finally, other hot topics in South Africa that will continue to be a driving force for funds leaving are tax emigration, the removal of financial emigration, encashment of RAs and getting inheritances transferred out of SA to South Africans living overseas.

In my view, therefore, we will only see these numbers steadily increase.