South African Rand News - Exchange Controls Relaxed

The government has just unveiled the 2008/09 budget and while we have had little time to go through the details, the two stand-out headlines for the Foreign Exchange market are that Eskom will receive ZAR 60bn (USD7.6bn) of funding from the government over the next five years, and that exchange controls on financial institutions'
ability to invest overseas have been relaxed. The Eskom news is positive insofar as the government has shown its commitment to plugging the energy gaps that have recently caused mine closures and other major disruptions. Eskom is reportedly to spend ZAR343bn on power projects over the next five years.
This is
positive news. However, the rand has reacted quite negatively to the news that exchange controls will be relaxed, falling over 1% since the announcement, taking the rand to a fresh 16-month low against the dollar. The limit on overseas investment has been raised from 40% of regulatory capital (imposed in 2005) to 40% of liabilities. Liabilities can exceed capital by 10 times.
However, while this news seems to be quite rand-negative, we would caution that this knee-jerk reaction may be overdone. The existing limits on overseas investment are not nearly being used, and so there is no reason (in theory) that the new limits will trigger an exodus of capital from S. Arica.