By Attila Kadikoy
The ability of investors to boost their offshore investment allocations has raised concerns about its potential impact on the South African economy. As a result, some now wonder if investing offshore is in some way unpatriotic or detrimental to the nation's fiscal health. From my point of view, nothing could be further from the truth.
To dispel the myths surrounding offshore investing and it’s supposed link to our economic resilience it’s important to remind investors what the purpose of investing actually is. Investing is a rational process aimed at optimising returns based on our risk profile. Investing helps individuals to save for rainy day occurrences and save for a purpose (such as retirement or funding children’s studies) and this, in turn, results in investors’ financial independence and less or no reliance on the state.
Therefore, as individual investors, our primary responsibility is not to uphold the South African economy with our savings; that is the purpose of taxation. Besides, the strength or weakness of the South African economy, along with the stability of the rand currency, is not solely determined by capital movement from pension or investment funds. These aspects are under the purview of the government and central banks, tasked with maintaining economic stability.
Central banks and governments themselves invest in reliable assets and currencies like gold and the US dollar. South Africa’s government and central bank are no exception. This doesn’t demonstrate a lack of patriotism but highlights the importance and value of diversification in investments.
Some argue that investing offshore equates to permanently removing money from the country. I’d say that, generally, advocates for offshore investment are not arguing for a complete divestment from local assets. Such a move would carry significant risks and is inherently irrational.
It is essential to differentiate this from individuals intending to emigrate, as their motivations and impact differ. Offshore investing is typically not permanent. Residents who invest offshore are likely to repatriate those funds when cashing in their pensions for example. This, in turn, bolsters spending capacity within the local economy and ultimately benefits the South African economy.
Local residents shouldn’t feel concerned about investing offshore - just by living in South Africa, they’re likely already contributing to the country's coffers through property investments, tax payments, and other forms of investments and spending.
In the past, we’ve severely restricted the ability for people to invest offshore. But this is not the solution to a robust economy. It hurts investors too. Restricting investors' ability to pursue offshore investments would be detrimental to their financial goals, exposing their capital to local currency risk, especially in light of the rand's continued weakening.
Critics of boosting offshore allocations also claim this diminishes liquidity in the Johannesburg Stock Exchange (JSE) and shrinks the local asset management industry. But, again, I don’t believe these are rooted in rational analysis. The JSE, after all, sees that the majority of investment from institutional investors, not individuals. Furthermore, South African regulations mandate that a significant portion (55%) of pension funds be invested locally. This ensures a healthy balance between local and offshore investments.
Enabling investors to allocate their funds based on their risk profiles and preferences fosters a more robust asset management industry. By expanding product offerings that facilitate offshore investments, the industry stands to gain increased profits, generate employment, and contribute to the South African economy.
What’s more, investors are offered more choice and by investing offshore, individuals tap into global income streams generated by companies like Microsoft and Tesla. If they’re not offered such choice by local financial services firms, then international ones will step into this space and in this instance, the money is more likely to remain offshore.
So, what is hurting our economy? I’d say that the real threat to the South African economy lies in excessive reliance on imported goods, as our capacity for domestic production diminishes. Current account deficits and trade imbalances are the primary drivers of capital outflows, not individual investment choices.
For a country to attract investment, stability and growth are paramount. It falls on the government to create an environment conducive to investment, rather than relying on individual consumers to prop up the economy. Capital, much like water, flows along the most efficient path. If investing some of that capital abroad aligns with logical investment goals, then it is a viable strategy. If investing locally makes sound financial sense, then money will remain here.
A thriving economy hinges on factors like transparency, a competent and independent central bank, and effective governance. If all these conditions are met, then an individual’s choice to invest offshore are unlikely to deter foreign investors from investing in South Africa.
To maintain investor choice and the ability to benefit from diversification, it is imperative that we dispel the unfounded concerns surrounding offshore investments. Instead, it’s important to recognize its potential to contribute to South Africa's economic resilience and help investors to achieve their investment goals.