‘ANC wants to use apartheid-era tool to force investment’

The ANC wants to use an apartheid tool, prescribed assets, for investment, and economist has said. The ruling party has promised before to implement this measure but failed. It is simply dusting off a previous proposed economic policy used at its manifesto launch. Will this time be any different?

Government introduced prescribed assets during apartheid when the country lacked access to global financial markets and had to search internally for the funding it needed. Prescribed assets are a policy of compelling pension funds to invest a prescribed portion of their assets under management in certain classes of assets, most probably government bonds, Jee-A van der Linde, senior economist at Oxford Economics Africa, explains.

But implementing asset prescription in the current mood would threaten to diminish the amount of capital available for lending to government, as well as the assets under management by pension funds, he warns.

“Rather than reintroduce prescriptions on asset classes, a much cheaper option is for government to aggressively start opening up the economy to the private sector. The resulting economic growth would boost government revenue, create more employment opportunities and improve confidence levels among businesses and households.”

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No need for prescribed assets anymore after 1994

Since 1994, South Africa has integrated into the global economy, with foreign investors becoming increasingly important players in the investment sphere. A serious problem with the proposed plan to force asset managers to lend the state the money is that the government’s credibility is shot.

Van der Linde says the intended policy comes at a time when there is a notable trust deficit in the country, fuelled by years where corruption flourished and the state was unable to implement effective policies.

“The return of ‘prescribed assets’ would hit equity prices, depress returns on fixed income, diminish South Africa’s appeal as an investment destination and subvert the asset management industry,” Van der Linde warns.

“Conversely, evidence of pro-business reform and increased private sector involvement will easily grease the wheels of growth and help attract new investment.”

South Africa’s investment rate has been dropping since 2013 in the public as well as the private sector, limiting the economy’s capacity to generate sufficient employment growth and expand the supply of goods and services.

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Reasons for investment decline

Low levels of private sector confidence, state capture and ineffective policies are among the key reasons for the decline, Van der Linde says.

“State-owned entities (SOEs), with Eskom and Transnet the largest and most important, have become hugely inefficient over the past 15 years, severely curtailing commercial prospects of business across the economy.”

According to National Treasury over a third of the decline in South Africa’s economic growth after 2010 can be explained by the direct effects of reduced productivity from public utilities. Van der Linde says this means that South Africa gave up R2 trillion in economic activity between 2011 and 2019 due to underperforming SOEs, a figure that has since increased substantially.

After South Africa lost its final investment-grade credit rating in early 2020, resulting in the country being ejected from the FTSE World Government Bond Index (WGBI) and triggering a sell-off of government bonds as the last of the WGBI tracker funds exited their positions, the post-pandemic reality has seen domestic macroeconomic fundamentals deteriorate more rapidly.

“As foreign ownership of domestic bonds declined, local banks and financial institutions stepped in to fill the void. South Africa is not alone in this regard, with government and SOE debt occupying large shares of the assets of financial sector institutions in many other developing countries.”

However, Van der Linde says, one could make the case that due to insufficient investment opportunities, owing to low economic growth and haphazard policies, South African investors did not have many investment alternatives such as large infrastructure projects, besides government bonds.

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South Africa’s total assets

The market value of South Africa’s total assets of non-bank financial intermediaries stands at roughly R15.1 trillion. These mainly consist of unit trusts (R3.9 trillion) and insurance companies (R4.5 trillion), the Public Investment Corporation (R2.6 trillion), public and private retirement funds and assets of other financial intermediaries.

“These savings were accumulated over a lengthy period as individuals collectively save for retirement and other reasons. The magnitude of these savings has, again, drawn government’s attention as a possible solution to the country’s growing and unsustainable debt problems,” Van der Linde says.

He points out that the problems of the domestic economy are structural and this is exacerbated by a lack of investment and insufficient maintenance of critical infrastructure over the years.

“South Africa needs a substantial investment drive to lift its economic growth trajectory and policy continuity to break economic inertia.”

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Slow progress makes it unclear if prescribed assets can be implemented

Given the slow pace of progress in recent years, it is unclear whether this option can be implemented in the short term to a sufficient degree to be a solution to the debt spiral government faces.

Moreover, he says, it will be much harder for South Africa to stabilise debt over the coming years as the country will need to run primary surpluses much larger than what was required in the decade before the pandemic.

“In reality, very few alternative options are left. Government already grabbed the Gold and Foreign Exchange Contingency Reserve Account profits, higher taxes are not feasible, cutting expenditure is seemingly impossible and to tap local and foreign capital markets during the current high-rate environment would be risky and costly.”

Van der Linde points out there is also little appetite on the government’s part for a pre-emptive engagement with the IMF as assistance would be accompanied by stringent terms and conditions.

“Besides, South Africa’s political climate makes engagement with ‘Western’ multilaterals unlikely for the foreseeable future. Loans from the New Development Bank or Brics+ governments are other options available that have not been fully utilised. In any event, pursuing prescribed assets in combination with a lack of credibility in government could precipitate an exodus of capital.”