Saving in a Foreign Currency

by Henk Botes

Protect your assets, or take the stress out of saving for your overseas trip, by saving in foreign currency.

South Africa operates a flexible exchange rate system, which means the value of the rand is determined by market forces. The demand for our currency, relative to the supply, will determine its value in relation to other currencies.

What determines currency movements?

The factors that determine currency fluctuations include the following:

  • The trade balance, which is the difference between a country’s imports and exports. The trade balance is an indication of the strength of a country’s economy relative to that of other countries.
  • The political climate. Political stability is very important to the value of a country’s currency, especially in an emerging economy like ours. The effect of Brexit on the value of the pound has, however, showed that political uncertainty can influence the value a developed economy’s currency as well.
  • Inflation. Inflation is the measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. Rising inflation has a negative effect on the value of a currency.

What is the effect of currency fluctuation?

While the impact of a currency’s fluctuations on an economy is extensive, most people do not pay close attention to exchange rates because most of their business is conducted in their domestic currency. For the typical consumer, exchange rates only come into focus for occasional activities or transactions, such as foreign travel or import payments.

Currency fluctuations do, however, have a significant impact on consumers as a weakening currency increases the cost of imports as well as the cost of overseas travel. Allocating some of your savings to offshore investments can help protect your assets against the effects of a weakening rand.

How does one save in foreign currency?

It can be difficult for South Africans to open a bank account in a foreign country. An easier and more cost-efficient option is to open a foreign currency bank account with a South African bank. Investors can use a foreign currency investment account to quickly, easily and conveniently switch their savings to a foreign currency. These types of accounts provide access to many different currencies, including the dollar, pound and euro.

With a foreign currency investment account, you can invest in foreign exchange with ease and in many cases there is no minimum amount, as long as the small money transfer fee is covered. An investment in a foreign currency account is an easy way to start diversifying your investment portfolio by including offshore assets.

 SARS and SARB regulations

The SA Reserve Bank allows any adult in South Africa R1 million to be invested or spent in offshore currency each year, without the need to provide additional documents. You do need a tax clearance certificate from SARS to take advantage of the foreign investment allowance that allows you to invest up to R10 million per calendar year.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.

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