Rand Drop Pushes South African Assets Abroad at Record Pace

  • `People moving money emotionally,' wealth manager says
  • Commodity rout, slow growth, ratings downgrades spur flight

South African investors are moving their money out of the country at the fastest pace ever.

Portfolio investment abroad jumped to the biggest quarterly outflow on record, the South African Reserve Bank said on Tuesday in its third-quarter report. Investors more than doubled the amount sent overseas to 24.2 billion rand ($1.65 billion) in the period from 10 billion rand in the previous three months, the central bank said.

“The exceptional rand weakness has made retail investors very nervous,” Rhynhardt Roodt, an analyst at Investec Asset Management Pty Ltd., which oversees about $105 billion, said by phone from Cape Town. These investors, “who did not have a lot of their capital offshore two or three years ago, are starting to do it now. You could argue that the horse has bolted.”

The rand fell to a fresh all-time low against the dollar Tuesday, under pressure from a credit rating downgrades, a worsening trade outlook and a possible interest rate increase in the U.S. next week. A China-led commodity rout this year could leave the economy growing at the slowest pace since 2009, according to central bank forecasts. The country narrowly avoided a recession during the third quarter, posting annualized expansion of 0.7 percent. 

Pessimism about the nation’s political and economic environment and the rand’s decline have created a negative feedback loop, Jean-Pierre du Plessis, fixed interest strategist at Prescient Investment Management Pty Ltd. in Cape Town, said by e-mail.

“The rand’s declines in 2001 and 2008 were more to do with a global crisis when in fact South Africa’s economic position was much stronger,” Du Plessis said. “Now, the country has become more vulnerable, as evidenced by the recent ratings movements, while dollar strength and weaknesses in emerging and commodity-producing countries like South Africa are also responsible.”

Deteriorating Potential

Fitch Ratings on Dec. 4 cut South Africa’s credit rating one level to BBB-, the lowest investment grade, and in line with the assessment of Standard & Poor’s, which lowered its outlook to negative from stable on the same day. The country’s growth potential has deteriorated further, Fitch said, which also cited the government’s decision not to tighten fiscal policy in the face of weakening revenue and rising debt levels. Flexibility around the budget might reduce because of risks associated with funding needs of state-owned companies, S&P said.

“For every rand investors placed with us, we sent 1.5 rands out of South Africa,” Andrew Rissik, managing director of the foreign currency trading unit of London-based wealth manager Sable Group Ltd., said by e-mail. “People are moving money emotionally and if this outflow continues, the Reserve Bank may reconsider the offshore allowance.”

South Africa this year increased the limit for individuals investing abroad to 10 million rand a year from 4 million rand.

“The investment outflow is also part of a trend that’s seen the JSE’s 40 largest companies almost double the amount of revenue they collect from overseas operations during the past 15 years,” Dirk Steyn, portfolio manager at Mergence Investment Managers Pty Ltd., said by e-mail from Cape Town. It’s increased from 37 percent of company revenue to as much as 71 percent, he said. Mergence has 19 billion rand under management.

Foreign investors purchased domestic equity and debt valued at 11.8 billion rand during the third quarter, compared with 54.8 billion rand in the previous three months, the central bank said.

The country’s investors purchased foreign equity and debt securities in almost equal amounts during the third quarter, the central bank said. The repatriation of the domestic financial industry’s foreign-currency deposits held with offshore banks as well as the redemption of loans extended to non-residents accounted for most of the swing in investments by local institutions to an inflow of 38.8 billion rand during the quarter from a 20 billion rand outflow in the previous period, the bank said.

“Investors increased their hard-currency exposure because of expected credit downgrades, weak local economic outlook and a probable U.S. interest rate hike this month,” Hubert Steenkamp, money manager at Johannesburg-based Tower Capital Management Pty Ltd., said by e-mail. The company has about $170 million invested.

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