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Cablegate: South Africa Continues Forex Control Liberalization

VZCZCXRO0606
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4716/01 3340852
ZNR UUUUU ZZH
R 300852Z NOV 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0275
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 PRETORIA 004716

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/JRALYEA/BCUSHMAN
USTR FOR PCOLEMAN

E.O. 12958: N/A
TAGS: EFIN EINV ECON ETRD PGOV SF
SUBJECT: SOUTH AFRICA CONTINUES FOREX CONTROL LIBERALIZATION

REF: 04 PRETORIA 5105

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

1. (U) Summary. In a recent address to Parliament, Finance
Minister Trevor Manuel announced the liberalization of
foreign exchange controls for banks and investment
companies. This announcement, made during his October
Medium Term Budget Policy Statement, was in line with South
Africa's gradual liberalization of forex controls. Banks
will be able to commit up to 40% of their domestic capital
outside the country, with a 20% limit on assets outside the
African continent. Once the South African Reserve Bank
(SARB) has announced the effective date, banks could
leverage up to R48 billion ($7.4 billion) in foreign
markets. Investment companies were immediately able to
increase their foreign exposure to 25% of total assets. No
changes on forex controls for individuals were announced.
Noting that the costs of foreign exchange controls may now
exceed their benefit, SARB Governor Tito Mboweni has
suggested that all controls be abolished. Notwithstanding,
Manuel seems intent on sticking to Treasury's policy of
gradual liberalization. End Summary.

Forex Controls Lifted For Banks and Investment Companies
--------------------------------------------- ------------

2. (U) In his Medium Term Policy Budget Statement on October
25, Finance Minister Trevor Manuel announced the
liberalization of foreign exchange controls for banks and
investment companies. Banks will be able to commit up to
40% of their domestic capital outside the country without
South African Reserve Bank (SARB) approval, with a 20% limit
on assets outside the African continent. This means that
local banks could leverage up to R48 billion ($7.4 billion)
in foreign markets, allowing them to compete on an equal
footing with most international banks. The move also helped
to level the playing field between ABSA (now owned by
Barclays) and the other major South African banks.
Previously, banks had to apply for a special exemption from
the SARB to operate freely outside South Africa. The new
measures are set to take effect once the government, the
SARB, and banks have agreed on an appropriate reporting
system.

3. (U) The new foreign exposure limits will regulate both on
and off-balance sheet bank assets. Transactions will
include underwriting foreign currency denominated bonds,
lending foreign currency to non-residents, issuing
guarantees, and investing in foreign bonds, shares, and
other assets. For the first time, South African banks will
be allowed to extend foreign currency denominated loans to
pay for approved South African company foreign direct
investment.

4. (U) Manuel also gave investment companies a break on
forex controls. After the announcement, mutual fund
managers were immediately able to increase their foreign
exposure to 25% of total retail assets, up from 20%.
Investment fund managers were also able to invest 25% of
assets abroad, up from 15%. These measures enable South
African residents to diversify their portfolios through
domestic channels and allow South African investment funds
to play a bigger role in the development of the African
continent.

5. (U) Manuel's announcement was another step in the gradual
process of forex control liberalization that started in 1995
(reftel). National Treasury maintains that it will continue
with this gradual process in the future. Treasury's stated
goal is to scrap all controls and replace them with limits
on the amount of foreign exchange that can be taken offshore
at any one time.

No Change For Individuals
-------------------------

6. (U) No changes to exchange controls on individuals were
proposed. The current R750,000 ($115,000) limit on the
amount of money that individuals may transfer abroad
remains. Manuel pointed out that the number of applicants
applying to take out more than R750,000 was "miniscule," but
that removing individual forex controls would likely be the

PRETORIA 00004716 002 OF 002


next step. Before this can happen, government must
terminate its amnesty program, scheduled for the end of
2005. South Africans who illegally moved or kept assets
offshore after apartheid are allowed to pay an amnesty tax
to repatriate funds or maintain their assets offshore
legally.

Mboweni Speaks Out
------------------

7. (SBU) SARB Governor Tito Mboweni has publicly advocated
that the government should consider abolishing what appear
to be "purposeless" forex controls, pointing out that "the
cost of exchange control administration and the
inconvenience that goes with managing (them) might not be
worth the exercise." Mboweni argued that further
liberalization of forex controls at this time would boost
confidence in the South African economy and likely lead to
capital inflows. [Comment: Mboweni has become increasingly
vocal of late, calling for labor reform and a U.S.-style
Council of Economic Advisors for South Africa. These public
forays beyond the spheres of monetary policy have South
Africans speculating about Mboweni's future political
ambitions. His current term as SARB Governor expires in
2009. End Comment.]

TEITELBAUM

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