South Africa is trying to lure a lucrative business back across its borders in an effort to reignite its standing in international finance.
Under proposed regulations published last week, the Reserve Bank would allow approved institutions to manage portfolios invested entirely overseas from an office in Joburg or Cape Town, even as the investments remain in New York, London or elsewhere.
That is the premise of the proposed Synthetic Financial Centre (SFC).
“We developed the SFC because South Africa should be competing for this business, not watching it move elsewhere,” said JSE CEO Valdene Reddy at a briefing on Friday.
Reddy chairs Operation Phumelela, an industry-led task force aimed at making South Africa more competitive in the world’s financial markets. Its steering committee includes some of the country’s most prominent financial executives, among them Nedbank chair and former Bank deputy governor Daniel Mminele, Old Mutual CEO Jurie Strydom and Remgro CEO Jannie Durand.
South Africa has long had the expertise and financial infrastructure to manage international investments, but exchange control restrictions have made it difficult for local firms to operate certain wholly international portfolios from within the country.
That’s pushed many asset managers to set up offshore structures in jurisdictions like Mauritius and Luxembourg, potentially taking management fees and associated economic activity with them. The SFC seeks to remove some of those obstacles.
Crucially, the change would not require new legislation. The first phase would be introduced through changes to the Bank’s existing exchange control framework, potentially shortening the path to implementation.
Lekker local
For example, a pension fund could appoint an approved local manager to oversee a portfolio invested entirely in US or European shares. The manager would not have to count those assets against its own offshore investment limit, provided it was acting on behalf of an eligible investor.
The pension fund, however, would still have to count the investment against its applicable offshore allowance.
In other words, Olano Makhubela, head of the Bank’s financial surveillance department, said at a briefing on Friday, the existing 45% prudential foreign investment limit would remain in place.
The reform therefore changes where foreign investments can be managed, rather than how much capital South African institutions are allowed to invest abroad.
Still, Reddy talked up the role of the SFC in strengthening South Africa’s competitiveness as an international financial centre. “It is far more than just the management of offshore assets that could now come to some of our South African financial institutions,” she said. “The potential becomes a lot bigger.”
Operation Phumelela cites Bank data showing that South Africans’ offshore portfolio assets rose from R2.7-trillion at the end of 2020 to R4.9-trillion by March 2026, an 83% increase.
The task force has separately estimated that R10-trillion in South African savings is managed offshore. However, this value is not necessarily an indication of how much investment management activity could realistically return to South Africa. Nor does it represent capital that would be redirected into domestic shares or bonds.
The economic opportunity instead lies in the services surrounding those investments. Portfolio management generates fees and supports businesses ranging from custodians and administrators to legal, accounting, compliance and technology firms.
Attracting international clients could also expand South Africa’s financial services exports, generating revenue without requiring the underlying investments to enter the domestic market.
The devil is in the compliance
Whether the SFC delivers these benefits will depend on how many institutions use it. Established offshore operations may have tax advantages, existing regulatory approvals and relationships with international service providers that make relocation less straightforward than simply changing an exchange control rule.
There are also, unsurprisingly, compliance requirements. Companies would need appropriate licences and approvals, while SFC activities would have to be isolated from their other operations and subjected to reporting obligations.
For the JSE, the immediate benefits may be relatively indirect. Managing international shares from Joburg does not necessarily translate into extra trading volumes on the local exchange.
But a “second phase” could prove more consequential.
The National Treasury’s Vukile Davidson indicated on Friday that future reforms could address tax arrangements and foreign currency listings on South African exchanges. The Bank’s proposal also identifies the potential for foreign currency-denominated shares and bonds, alongside changes to market infrastructure and other legal and regulatory arrangements.
For now, the first phase is open for public comment until November 30, with Operation Phumelela anticipating implementation before the end of the year.
The SFC may make it easier to conduct international investment business from South Africa, but it cannot guarantee that international clients — or the fees they generate — will follow.
