News on the ‘wealth’ for the sovereign fund eagerly awaited

On Wednesday Finance Minister Tito Mboweni is expected to shed light on statements made in the State of the Nation Address around the creation of a sovereign wealth fund and the establishment of a state-owned bank.

President Cyril Ramaphosa announced that government has decided to establish a sovereign wealth fund “as a means to preserve and grow the national endowment of our nation, giving practical meaning to the injunction that the people shall share in the country’s wealth”.

According to the international Sovereign Wealth Fund Institute, a sovereign wealth fund (SWF) is a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, or fiscal surpluses.

In the 2019 Medium-Term Budget Policy Statement National Treasury projected South Africa’s debt to reach 71% of GDP in two years’ time.

Objectives

The institute says the objectives of such a fund are to protect and stabilise the budget and the economy from excess volatility in revenues or exports. It can diversify income from non-renewable commodity exports or earn greater returns than on foreign exchange reserves.

The timing of the president’s announcement is puzzling, says Jannie Rossouw, head of the School of Economic and Business Sciences at the University of the Witwatersrand.

“I do not think it makes any sense to start such a fund when you have massive government debt and a ballooning current account deficit.”

Rossouw says there is this strange notion that South Africa needs such a fund.

There seems to be the view that the official gold and foreign exchange reserves that are currently managed and monitored by the South African Reserve Bank (Sarb) should rather be placed in such a fund.

According to Sarb’s website, the US dollar equivalent of the official gold and foreign exchange reserves amounted to $54.6 billion at the end of January.

Rossouw says there’s a possibility that this is what is being considered, but that there would be little logic in such a decision.

“Having said that, we have not seen the most logical decisions or remarks from government in the past ten years. It is similar to saying that government is going to create a state-owned bank.

“Who would deposit their money in a bank operated by government?”

These are simply “emotionally loaded” announcements, says Rossouw.

Jean du Toit, senior admitted attorney at Tax Consulting SA, says the notion of creating a sovereign wealth fund is a contradiction in terms. “This would imply that we do have surplus funds.”

Countries like Malaysia and Singapore have developed a different model where the income from state-owned assets is pooled into a single fund and is administered and managed from there.

Du Toit says these governments use the fund to invest in specific strategic sectors of the economy that appear less attractive to the private sector . In this way the government increases its own stake in strategic sectors in the economy.

Non-monetary aspects also missing

“However, this will require good governance and good management of state-owned entities,” he says. “The investments must be driven by solid commercial substance and sense, otherwise [such a fund] will not achieve the desired objectives.”

South African state-owned companies survive mainly due to multi-billion-rand government bailouts.

Surprisingly, Wikipedia lists South Africa as one of the countries with a sovereign wealth fund – along with China, Norway, Hong Kong and Singapore.

The fund listed is the Public Investment Corporation (PIC).

This is clearly an error, says Rossouw. The PIC is a fund manager for funds that technically do not belong to the state, such as Government Employees Pension Fund. “The state may sometimes think [these assets] belong to them, but they belong to the members of that pension fund.”

Rossouw says the PIC is not sitting on a “pot of money” that it is managing for its own account. It is managing the money on behalf of other people or institutions.

He adds that if any surplus income was ever to become available to government, the wise thing to do would be to pay off debt. Everyone knows that paying your debt first is the best way of saving, he says.

Government’s debt service cost for 2020/21 is estimated at R233 billion.

This is more than the amount government is spending on economic development (2020: R217 billion).

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