More hope, but volatility still sees South Africa's wealthy looking to offshore trusts03 Apr 2018
South Africa might be the most developed economy in Africa, but it faces a lot of well-documented issues. Ahead of the STEP South Africa conference, Ocorian’s Global Head of Private Client - and native South African - Grant Barbour looks at how wealthy South Africans are handling the volatility.
After years of being plagued by issues such as high poverty, unemployment and crime, some hope has finally returned to South Africa. The ANC’s new leader, Cyril Ramaphosa, has replaced controversy-ridden Jacob Zuma, and the mood in the country of my birth, and Africa’s most developed economy, does seem to be improving.
Yet Ramaphosa is leading an ANC plagued with divisions, and there is vagueness around government policy - neither of which is good for a country’s economic outlook, likely why South Africa’s credit rating has been downgraded several times in recent years. Plus, South Africa still has exchange controls, a remnant of the 1940s when it was brought in to protect the economy and yet was never really taken away. All of this makes investors nervous, and it also makes the local population nervous. Fear is being stoked within the country, especially with the right wing talking about nationalising mines, banks and other strategic sectors of the economy.
All of this is driving South Africa’s wealthy to diversify their portfolios. A lot of wealthy South Africans are - or if they’re not, they should be thinking of - setting up structures outside of South Africa in order to protect them from the volatility that’s associated with the country. They’re not taking their money out of the country for increased returns or because they may get a better tax deal; they’re doing it because they don’t want to have all their eggs in one basket in a country where the political and economic situation can change very rapidly. Where the structure is based depends on the needs of the individual, but the reasoning is common: they don’t want their money stuck in South Africa if they need to move quickly.
Trust outside South Africa to hedge investment
The concept of a trust is familiar to South Africans; the country has its own trusts, and they are understood and well-liked. A South African trust is based on principles of contract, whereas English trusts are based on principles of equity. South Africans will generally use a South African trust for domestic assets, but when taking money out of the country they will look to the UK, Jersey or Mauritius, all of whose trust laws are based on English trust legal principles and who have a similar take on the trust concept.
A trust or structure set up outside of South Africa diversifies political risk, and it also hedges an investment in mainstream currencies like pounds or euros or dollars against the volatility of the South African rand.
While I would say we’ve seen an improvement in the mood in South Africa recently, especially with Ramaphosa coming into power, there is still a lot of hesitation and a lot of recognition of the problems the country still has to solve. Unemployment is massive. There’s a very small tax base that is really supporting the entire country, and the country is running a fairly large fiscal deficit. All of those things compound to create a sense of nervousness amongst wealthy South Africans.
There is hope. Ramaphosa is a strong leader, he’s a very intelligent individual and he’s well versed in business. But he must address the division in the ANC so that the country can move forward and look to address the socio-economic problems. Poverty runs very deep in South Africa; 40% of the population live on less than $1.75 per day. And that’s just one thing.
There are a lot of big things that need to be fixed in South Africa - it’s not an easy fix - and until those are addressed, the country’s wealthy will continue to look towards diversifying their portfolios through offshore trusts.
Grant Barbour will be attending STEP South Africa Conference from 23-24 April 2018.
Arrange a meeting with Grant or make an enquiry to find out more about Ocorian's award winning Private Client services.