/ 28 February 2020

State can’t yet afford wealth fund

February 26 2020 - Budget media briefing Parliament, Cape Town. Photo by David Harrison
What’s cooking? Tito Mboweni has announced a sovereign wealth fund, but analysts have cast doubt on its viability. (David Harrison)

Finance Minister Tito Mboweni has announced that the government will form the South African Sovereign Fund, with starting capital of about R30-billion.

“A sovereign wealth fund is an important long-term tool for saving and investment for future generations. It can also contribute to strengthening the fiscal framework,” said Mboweni.

But experts canvassed by the Mail & Guardian say the government is barking up the wrong tree with its plans to establish a sovereign wealth fund. They say countries that institute this kind of fund are those that are rich in commodities and have a budget surplus — neither of which South Africa posses at the moment.

Financing the fund would be difficult because of South Africa’s budget deficit, which is approaching 7% of gross domestic product (GDP); debt levels that are rising rapidly and a tax intake that has dropped, said George Glynos, co-founder and head of research at financial market and analysis firm, ETM Analytics.

“What you find is that countries that have plenty of resources and are running a surplus of some kind are typically the kind of countries that go for things like the sovereign wealth fund,” he added.

University of the Witwatersrand professor Michael Sachs, who works at the Southern Centre for Inequality Studies, said the purpose of the fund is not clear at this stage. “The real question we should be asking is what is the [fund] trying to do that we cannot do at the moment with the current funds we have?”

According to treasury figures, South Africa’s debt-to-GDP ratio is expected to reach 65.6% in 2020-2021. It is then projected to rise to 74.6% in 2023.

(John McCann/M&G)

South Africa’s tax collection remains weak. In 2018-19, tax revenue collection amounted to just less than R1.29-billion. It was projected to be more than R1.3-billion. The collection shortfall of more than R100-million is attributed to low personal income and company tax levels.

The idea of a sovereign wealth fund was brought up by President Cyril Ramaphosa at his State of the Nation address early in February.

In his address, the president said his administration decided to create 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”.

The finance minister did not specify the time frame in which it will be created. But he said, given the legal issues, a relevant bill will be submitted to Parliament.

It was also not clear where funding will come from. Mboweni indicated that the areas from which they will source it are: the proceeds of spectrum allocation; petroleum, gas or minerals rights royalties; the sale of noncore state assets; future fiscal surplus and money they set aside for this specific purpose.

According to Investopedia, the primary functions of a sovereign wealth fund is to stabilise the country’s economy through and to generate wealth for future generations. It notes that the motivation to develop such a fund varies from one country to another.

Mineral Resources and Energy Minister Gwede Mantashe said last week in Parliament that mining royalties could be used to start a sovereign wealth fund.

“The president spoke to the sovereign wealth fund … Many people asked the question, ‘Where will money come from?’ I can tell you that all the mines pay a royalty to the state. It can be used to start a royalty fund,” said Mantashe.

But Wits professor Sachs said this will create more financial problems for the fiscus.

Mineral royalties that the mining houses pay when they extract minerals from the ground form part of budget revenue, said Sachs.

“So, if you now say that is no longer part of budget revenue, and it must go into a sovereign wealth fund that means there is going to be a bigger hole in the budget.”

Glynos from ETM Analytics suggested that the government should try to use the funds it already has and work on gaining more revenue.

“If they are talking about creating a fund for rainy days that is okay. But the first step towards doing that is by creating a surplus environment,” Glynos said.

You cannot do it without surplus or else, by definition, you are just borrowing. And that is what is getting us into trouble to begin with.”

Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian