Over the past decade SA has experienced step changes in its capital-flow dynamics. In 2015, post Nenegate, investors lost confidence in the country’s fiscal sustainability and started to position for a sovereign downgrade, which materialised in 2020, triggering expulsion from the FTSE world government bond index (WGBI) and the loss of index-tracking capital inflows.
In 2022 the Treasury increased SA’s offshore investment limit from 30% to 45%, initiating another tranche of capital outflows, this time by domestic investors. The stock of foreign investment in SA is therefore now smaller than SA investment abroad.
Until 2015 the value of nonresident investment in SA was greater than SA investment offshore. In 2015 this positive balance narrowed to R100bn, and in 2020 it turned sharply negative as SA’s offshore investments outstripped nonresident investment into the country.
This reversal has had a negative effect on demand for domestic assets, especially the currency. However, a case is to be made that though not yet complete, most of the headwinds from these structural reallocations may be behind us.
Heavy lifting
According to data published by the Reserve Bank, foreigners sold R340bn of JSE-listed shares in 2015-20, R125bn more in 2020, and since 2022 selling came to more than R500bn, R140bn of which has been so far 2025. Foreign ownership of JSE-listed equities has declined from 29% in 2015 to 18.3% in 2024.
Adding to equities’ woes, with the advent of the increase in the offshore investment limit from 30% to 45% in the 2022 February budget, SA asset managers and insurers increased their net offshore equity and bond portfolio allocations by R200bn in 2022, R32bn in 2023 and R51bn in 2024.
However, while investors continue to increase their offshore allocations, the data suggest that most of the adjustment is done. SA’s total stock of foreign assets (excluding derivatives and central bank reserves) has plateaued and appears to have stabilised at current levels. In addition, offshore demand for bonds has started to recover. Whereas foreign demand for SA equities is driven predominantly by domestic economics and the relative price of domestic to developed market equities, foreign demand for bonds can be more a function of global factors.
SA’s fiscal challenges have increased the interest rate foreigners charge to lend SA money, but inflows into domestic bonds have started to improve even as equity flows have deteriorated. Foreigners own about a quarter of SA’s government debt, down from 40% in 2018, but since 2023 have purchased R185bn of government bonds.
Low inflation, the pursuit of a lower inflation target and confidence in the Reserve Bank’s independence have increased the attractiveness of SA bonds. The country’s institutional strength and credibility will be further enhanced with the adoption of a fiscal anchor, which is under discussion by the Treasury and its stakeholders.
Investors and ratings agencies have responded positively to suggestions that a fiscal anchor is adopted to set limits on debt levels, spending and deficits (when spending exceeds revenue), as a way to keep these metrics from spiralling out of control. As with inflation targeting, its success relies heavily on credibility.
A source of foreign funding that has received less attention is tourism. During Covid-19 receipts from foreign travel nosedived, from R120bn in December 2019 to R10bn in June 2020. The value of inflows has taken until the first quarter of 2025 to return to 2019 levels. The loss of receipts from inbound travel since 2020 has been just more than R1-trillion, and this headwind could become a tailwind.
Less exposed
Asset prices and capital flows have done much to adjust to the loss of the sovereign investment grade status, low growth and increased offshore allocations. Growth expectations have been beaten into submission and asset prices are more reflective of reality and less prone to disappointment.
The currency faced a surge in outflows and a stronger dollar, depreciating from R15.20/$ at the start of 2022 to R18.90/$ at the end of 2024. The increase in offshore allocations also provides a counterbalance when dividends and interest are repatriated.
Much of the bad news may have been priced into the currency, and reduced offshore ownership means SA markets are less vulnerable and more resilient in the face of offshore swings in risk appetite. At the very least, at the margin capital-flow dynamics will be a smallerobstacle to investor returns.
• Silberman is economist and macro strategist at Matrix Fund Managers.
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