BRIAN KANTOR: Foreign assets held by South Africans now as valuable as foreign liabilities

The good news is that the market value of assets held abroad by South Africans as direct investments and in portfolios offshore (R5.65-trillion at 2017 year end) now closely matches the value of SA assets owned by foreigners.

That our foreign assets are as valuable as our foreign liabilities is especially pleasing given that South Africans have had to give up so much of their patrimony over recent years to fund the excess of their spending over their incomes. Such financing opportunities provided by foreign savers have come with a cost to South Africans. It has meant giving up a share of the companies they own and incurring more debt to foreigners.

Yet despite the extra debt SA taxpayers have incurred over the years since 2002 and the assets sold to foreign investors, (a cumulative R5.7-trillion between 2000 and 2017, according to the financial accounts) we appear no less (net) asset rich than we were.

What is perhaps less pleasing is that South Africans still pay out far more in interest and dividends to foreign share and debt holders than they receive from their foreign investments — about R160bn more was paid out in 2018 to foreign holders of SA assets than was received by South Africans on their foreign portfolios.

This R160bn net dividend and interest payments abroad are a very large part of the current account deficit on the balance of payments in 2018. The trade account of the balance of payments has been in rough balance.

Given the equivalent value of the assets and liabilities on the SA balance sheet, it follows that the running yield on the SA portfolio held abroad must be significantly lower than the yield received in dividends and interest by foreign investors in SA. The yield earned by foreign investors in SA is of the order of 5% [per annum, while the SA portfolio held abroad has a yield of only about 1% per annum, though in 2005 and 2006, when the SA economy was growing strongly, the respective yields were about the same.

Since then, after a brief interruption caused by the global financial crisis of 2008-09, the yield on SA assets held by foreign investors has stabilised at the 5% rate, while the yield on the SA offshore portfolio has remained at the much lower rate or about 1% per annum.

Yield can be paid effectively out of capital that is expected to have a short life. In other words, the high yields (as in the early troubled 1990s) may be regarded as a repayment of capital that is not expected to have a long economic life. 

By contrast, when the outlook for capital growth is more promising current yield can be postponed in exchange for capital growth. The low yield of only 1% per annum realised on assets owned by South Africans abroad indicates that SA investors in assets abroad must be hopeful of significant capital gains on their offshore investments, enough to make up for the low initial yield.

Any appreciation of the SA balance of payments and the mix of SA foreign assets and liabilities must have full regard to the role played by Naspers.

Naspers made a direct investment in Tencent, a fabulously successful Chinese internet company with a listing in Hong Kong. In the listing of foreign assets owned by South Africans by country, total direct investment by South Africans in China in 2017 was recorded as R2,041bn. Almost all of this must represent the value of the shares held in Tencent by Naspers. This valuation was equivalent to 36% of all the direct and portfolio investments held abroad by South Africans at  December 31 2017.

The dividends paid by Tencent have grown strongly over the years but its share price has increased even more rapidly, reducing the dividend yield to shareholders, including dividends paid to Naspers, and so reducing the average yield on SA investments made abroad. The dividend yield on a Tencent share is currently a mere quarter of 1%.

Had South Africans been willing to sell more of their Naspers shares to foreign investors and invested the proceeds in much higher yielding alternatives offshore, the balance of payments would have looked better. The economy might have accordingly been regarded as less fragile — less exposed to the withdrawal of foreign capital on which it heavily depends. But the total returns earned by SA shareholders — minus Naspers — would have been a lot lower.

Exchanging the prospect of capital gains in Naspers for lower yield by holding on (in part) to their Naspers shares has served SA investors very well. It has not been as obviously beneficial to the balance of payments flows. In other words, the balance sheet has performed much better than the income statement.

There is a further implication of the Naspers success story. The value of the investment in Tencent by a company under SA jurisdiction is a national asset of macroeconomic significance. It is most unlikely that the control of such a highly valuable asset would be allowed to migrate away. A secondary listing of Naspers abroad could serve shareholders and national interest.

• Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity