The World Cup last year put a real focus on South Africa, showing it as a modern vibrant nation that - while not without its problems - is a beacon to the rest of the continent. 20 years after Nelson Mandela’s release and the beginning of the end of apartheid, the country is increasing its wealth and open for business to the wider world.
The World Cup last year put a real focus on South Africa, showing it as a modern vibrant nation that - while not without its problems - is a beacon to the rest of the continent. 20 years after Nelson Mandela’s release and the beginning of the end of apartheid, the country is increasing its wealth and open for business to the wider world.
While South Africa remains a comparatively small market compared to the Western giants, it has been punching above its weight for some years. While it certainly suffered during the downturn, it has bounced back well, and asset levels are now on a par with those seen three years ago.
The performance of the market over the past year is also leaving asset servicing smiling. According to statistics from the Johannesburg Stock Exchange (JSE), the number of equity transactions rose 22.4 per cent in the first half of 2010, generating revenue for the JSE of ZAR164.8 million (£15.41 million), a 13.4 per cent increase.
Regulation
From being a fairly insular economy, the South African government and regulators have decided to open up somewhat in the past couple of years. Of course, part of the reason for the country’s relative immunity to the international economic downturn was its existing regulation, which meant that domestic investors tended to invest domestically, while international players were not in the market enough to spread the contagion.
But there is an understanding that if the country is to compete on the international stage - and to improve the lives of its citizens, particularly those at the bottom of the ladder - South Africa must become more internationalist.
In October 2008, foreign exchange controls were relaxed, meaning foreign capital allowance for residents, which was last adjusted in 2006, would be increased from ZAR2 million to ZAR4 million, while the single discretionary allowance would be increased from ZAR500,000 to ZARR750,000.
The Government also raised the limit on the amount institutional investors can take offshore by five percentage points. The limit will be between 25 per cent and 35 per cent for investors, depending on both the type of investor and the type of investment.
“Previously, the foreign exchange controls placed obvious constraints on the industry and the available assets to service in the local market,” says one custody leader. “These constraints have now been eradicated and investors can now look further at greater investments into sub-Sahara regions, as just one example,” who adds that foreign investment into the region will now become more appetising, and domestic investors looking to expand their footprint in Africa will now be more attainable. From a securities services provider perspective, the future looks very promising.
The South African government has also announced a review of the prudential framework for foreign investment by private and public pension funds. This will include the Government Employees Pension Fund. A prospective review date is yet to be announced.
It’s not just the Government that is looking to bring in the changes. The Johannesberg Stock Exchange has invested heavily in technology and infrastructure and is now looking to bring the settlement timeframe more in line with modern standards. Currently at T+5 settlement, many in the industry have voiced concern that as volumes grow, the potential for reducing liquidity and efficiency and increasing risk also grows. As a result, the exchange is looking to move to T+3 as soon as possible.
Interest
New funds have entered the market, while many of the existing participants have expanded their offerings. This is combined with the country’s position at the forefront of a continent that is increasingly open for business. The risks of investing in many newer markets, however, means that many firms prefer to base themselves in the relatively safe environment in the south while looking for opportunities elsewhere.
In 2009, HSBC launched its SA synthetic DMA platform and expanded its Market Access product to a number of neighbouring countries, including Nigeria, targeting an increasing number of investors with an interest in this part of the world.
“We have high hopes for many of these markets,” says a spokesman for one South African bank. “We have given ourselves the opportunity to kickstart the market here - as they become more sophisticated and more funds look to invest in this area of the world, we are going to be able to service the investment that comes in. We don’t expect there to be enormous growth straight away, but there will be business and we are in a prime position to take advantage of that.”
It’s not straightforward, though, as head of business development at Finsettle Ted Hampson explains: “Common challenges are faced by the different exchanges across Africa, which include liquidity in the markets, standard or similar governance and reporting principles, effective and standard settlement cycles at T+?, effective use and/ or adaptation of technology, movement to electronic trading systems, the need to increase bandwidth, education of companies towards listing as a capital raising alternative, consumer education related to investing in a stock exchange, effective available research, education and training of market participants, customer management systems and techniques, navigating the needs of different exchanges, countries and regions as further trust is fostered for all to take advantage of the future opportunities. These common challenges present business opportunities for those with vision....”
Players
The big global names are out in force in South Africa, with State Street, J.P. Morgan and others leading the way. Domestically, Standard Bank has a reputation for quality of service at a low cost, while other African banks - in particular those from Nigeria - have a small but growing footprint.
And all of this is designed to offer clients access to markets across the whole continent - or at the least those countries in central and southern Africa. Last year, Standard Chartered Bank set down a marker in Africa after buying Barclays Bank’s one remaining foothold in the business.
Barclays exited the custody world in 1998, leaving only its pan-African operation. While it insists the business is still profitable, management by a global operator would give it a boost, according to Barclays.
Operations are present in eight countries where direct custody capabilities have been added: Botswana, Ghana, Kenya, Mauritius, Tanzania, Uganda, Zambia and Zimbabwe.
Indirect capabilities are available in Egypt, Cote d’Ivoire, Malawi, Morocco, Namibia, Nigeria, Tunisia and South Africa. These are provided through a network of third party sub-custodians powered by an operations hub in Mauritius.
It’s this sort of operation that international funds are increasingly sourcing. And as South Africa matures, many experts believe it will pull its neighbours up behind it. “We’re confident in South Africa and have a lot of investment there,” says a representative of one fund management company. “Nearby, we would be happy to work in Botswana and, to a lesser extent Kenya and Tanzania. We’re hoping that more as more countries come on stream, we will have more opportunities to operate outside Johannesberg.
