Cablegate: South Africa Takes Another Step Toward The

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A


(U) This cable is Sensitive But Unclassified. Not for
Internet distribution.

1. (U) Summary. In his October Medium Term Budget Policy
address to Parliament, Finance Minister Manuel took important
steps in the gradual relaxation of foreign exchange controls
that began in 1995. He removed foreign exchange controls on
South African corporations and allowed foreign company
listings on the South African bond and securities exchanges.
The government hopes that these changes will help South
Africa become a larger player in global and regional capital
markets, and attract more foreign investment to the country.
South African Reserve Bank (SARB) approval is still required
on all outward foreign investments. Foreign investment
restrictions still remain on individual investors,
institutional investors, and corporate portfolio investment.
End Summary.

Corporate Foreign Exchange Controls Relaxed

2. (U) In his October Medium Term Budget Policy address to
Parliament, Finance Minister Manuel took another important
step in the gradual relaxation of foreign exchange controls
that began in 1995. He removed foreign exchange controls on
South African corporations. The move makes it easier for
South African firms to invest directly abroad, but does not
apply to portfolio investment. Previously, South African
companies were restricted to R1 billion ($120 million) in
outward investment and R2 billion ($320 million) when
investing elsewhere in Africa (plus 20% of the excess cost of
a particular project). South Africa has been a leading
foreign investor on the African continent despite these
restrictions. South African corporations may also retain
foreign dividends offshore and, as from October 26, 2004, may
transfer repatriated dividends offshore again for any purpose
at any time.

3. (U) The foreign exchange controls that remain restrict
individual investors to holding no more than R750,000
($120,000) in assets offshore and institutional investors,
such as pension funds, long-term insurers, and investment
managers, to holding no more than 15% of their total
portfolio assets offshore. Mutual fund managers may invest
up to 20% of their portfolio assets offshore.

Central Bank Still Has Final Say

4. (U) All South African companies must still apply to the
SARB Exchange Control Department before investing offshore.
The primary decision criterion is whether the investment
benefits South Africa, but the size and timing of an
investment may also be considered. The SARB reserves the
right to stagger capital outflows on large foreign
investments to minimize the disruption on the local foreign
exchange market.

Foreign Secondary Stock Listings

5. (U) Manuel also recently announced that foreign companies
would now be allowed to establish a secondary listing on
South African securities bond and securities exchanges.
South African individuals will be allowed to invest in these
foreign corporations without restriction. Institutional
investors may also invest an additional 5% of their total
portfolio assets in foreign corporations listed in South
Africa. (Note: This 5% is in addition to the imposed limits
on offshore investment of 15% and 20% of total portfolio
investment mentioned previously. End Note.) The government
hopes that the move will entice more foreign companies to
locate in South Africa.

6. (U) Aquarius Platinum, an Australian mining company, will
likely be the first foreign company to take a secondary
listing on the JSE Securities Exchange (JSE) by the end of
November. Celtel, a pan-African cell phone company, is
second in line and may take a secondary listing in the first
half of 2005. Anooraq, a Black Economic Empowerment (BEE)
owned mining company with a local presence, is another
company interested in a JSE listing. (Note: Anooraq is the
first BEE company with a primary listing in North America; it
lists on both the Toronto (TSX) and American Stock (AMEX)
exchanges. End Note.)

7. (U) The South African Reserve Bank (SARB) still must
approve all secondary listings in South Africa. In line with
New Partnership for African Development (NEPAD) objectives,
which are championed by the South African government, its
stated policy is to favor those foreign companies located in
or undertaking most of their activities in Africa.

Realistic Hopes

8. (U) The government hopes that the relaxation of exchange
controls and the introduction of foreign listings will
encourage foreign investment in South Africa, improve the
country's draw as a regional financial center, and facilitate
global expansion by South African companies -- especially
into the rest of Africa in support of NEPAD. The government
also believes that these changes will help grow the country's
capital markets, improve market liquidity, and foster greater
corporate competitiveness.

9. (U) Government officials did not expect a flood of capital
outflows as a result of this latest foreign exchange control
announcement, since the decision was part of the gradual
relaxation on foreign exchange and not made in response to
demand. Moreover, outward foreign investment has leveled
recently, as South African companies appear to be more
interested in expanding along with their own economy, which
is being driven by strong consumer demand and historically
low interest rates. Officials expect large South African
corporations and mining companies will be the first ones to
take advantage of the nearly free reign to invest abroad.

10. (U) Most economists agree that the rand will face only
mild weakness as a result of this policy change, since the
currency continues to be strong due to interest rate
differentials with the markets of major currencies. Indeed,
the rand has appreciated 25% against the U.S. dollar since
January 2003 and forex markets greeted the Minister's
announcement with no discernible movement. Only one labor
and one NGO group expressed concern about creating
"footloose" South African capital at a time when greater
investment at home was needed to fuel higher growth and
employment. To them, the relaxation of foreign exchange
controls seemed to fly in the face of government's goal of a
gross fixed capital formation ratio of 25% of GDP by 2014.
Currently, gross fixed capital formation is about 16% of GDP.
The opposition Democratic Alliance had no such worries as it
publicly stated its support for Minister's decision. It
viewed the government's move as vote of confidence in the
South African economy, and a signal of the end of foreign
exchange controls born in the market distortions of the
apartheid era.


11. (SBU) These announcements demonstrate South Africa's
continued commitment to economic liberalization and to the
eventual removal of all foreign exchange controls. On the
other hand, the SARB still must approve every foreign
investment made by a South African company. We will keep an
eye on how transparent and/or sticky the approval process is,
but believe it unlikely that the SARB, which is an
independent institution owned by member banks, will create
many difficulties. The government wants to attract greater
foreign investment, become a more prominent regional and
global player in the capital markets, increase domestic
market capitalization and liquidity, and foster greater
domestic competition. While the relaxation of foreign
exchange controls is a step in the right direction, it is
just one of the policy changes needed to accomplish these

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