This is a guest post by John Causey, a private equity consultant based in South Africa, who specializes in sub-Saharan Africa transactions.
In a pithy headline Richard Grant, writing for Forbes Magazine, recently remarked that “It Cost Mark Shuttleworth More To Leave South Africa Than It Did To Leave The Earth.” The attention-grabbing headline, while technically accurate, requires explanation.
Mark Shuttleworth, a noted South African philanthropist and venture investor, decided in 2009 to move his remaining cash positions out of South Africa. Through powers granted under exchange controls legislation, the South African Reserve Bank (SARB) imposed a levy of 10 percent (USD 30 million at that time). The case that followed was decided in favour of the SARB, and Shuttleworth’s arguments that exchange controls were an unconstitutional taking and that the method of enforcement deprived South Africans of due process were rejected by the courts. The levy payment of USD 30 million to the SARB remained, and that payment dwarfed the USD 20 million he paid to become the first African in space in 2002, giving Mr. Grant the fodder for the aforementioned Forbes headline.
Exchange controls allow for the regulation of the manner in which capital flows into and out of a country, and while common on the African continent, they are scarcely seen in more developed economies. In South Africa, exchange controls were established many years ago, and were applied forcefully during the apartheid era to combat capital flight and to ease balance of payments pressures. Though not as rigidly enforced as in the past, they remain one of the vestiges of the Afrikaner Nationalist government, which the ANC has opted to not dismantle.
Proponents of exchange controls argue that smaller economies are affected too greatly by developed world monetary policies (e.g., seemingly endless rounds of quantitative easing in the U.S.), and that controlling currency flows gives these economies more stability and independence. If free flows of capital were allowed, they argue, domestic monetary policy alone would be ineffective in staving off capital account deterioration, inflation and currency devaluation.
As articulated in Shuttleworth’s suit, opposing views are largely political and fairness based, and the primary financial argument deals with discouraging investment. By taking away the ability to easily repatriate funds, a form of investment irreversibility is introduced that deters investors. Additionally, there is the administrative headache which Shuttleworth cites as a prime reason for running all of his philanthropic and other international activities outside of South Africa.
Large institutions and banks in South Africa avoid these layers of red tape and levies by opening shell companies in countries like Mauritius to run their international operations. Though this solution works for large corporations, it comes at a cost of lost tax revenues and jobs to South Africa. Unfortunately, opening foreign shell companies isn’t a viable option for job creating small and medium sized enterprises who aspire to transact outside of the relatively small South African marketplace.
For those cheering with Shuttleworth for the swift eradication of the controls, don’t hold your breath. There is a flood of bad economic news coming out of South Africa in the form of BMW halting future investment plans, Morgan Stanley labelling the country as a “Fragile Five,” the IMF and World Bank issuing warnings to the country, business leaders vocalizing dissatisfaction with the status quo and a seeming lack of progress in NDP implementation. For these and other reasons, it’s unlikely that the effects of such a move would net a positive near-term result and thus difficult to justify by either the government or SARB.