/ 27 September 2023

Sovereign wealth fund needs a hero


A decade ago, the newly-formed Economic Freedom Fighters set out its intention to establish a sovereign wealth fund should the party ever come into power.

“This fund will also assist in the insulation of the South African economy whenever there are volatilities in resource-sector prices and when non-renewable resources are exhausted,” the EFF’s founding manifesto reads. “As we speak, despite massive resource riches, South Africa has no sovereign wealth fund, mainly because South Africans do not own their resources,” 

Years later, when the world was teetering on a pandemic-induced economic disaster, the party’s ambition would be championed by an unlikely hero: President Cyril Ramaphosa, who announced his administration’s plan to establish a sovereign wealth fund in his State of the Nation address.

Then finance minister Tito Mboweni would later reveal that South African Sovereign Wealth Fund would have a target capital amount of R30 billion, about $2 billion at the time. “We must learn to save during the good times,” Mboweni said, “and a fund can play an important role as a counter-cyclical fiscal tool.”

A lot had changed between 2013 and 2020 — and there were many more shifts on the horizon. Notwithstanding the EFF’s expanded political influence, helped by the ANC’s fall from grace during the state capture years, South Africa’s economy had received its fair share of transformative blows.

For one, the 15-year commodity boom that had buoyed the country’s economy — and its public finances — had finally come to an end, shattering its growth prospects. The economy also suffered successive ratings downgrades, ultimately resulting in South Africa falling into junk status in 2017.

As a result, when Ramaphosa made his sovereign wealth fund intentions known, a development the EFF delighted in, commentators were sceptical. The country’s public finances were in trouble and the ANC government was struggling to restore its credibility in the aftermath of what the president deemed “nine wasted years”.

Little did we know that the pandemic’s economic onslaught was creating the conditions for another commodity boom, which — if used to its full potential — may have helped the ANC-led government avoid the hard fiscal trade-offs that now threaten its political relevance.

As early as the latter half of 2020, there were signs that a commodity windfall was on the horizon.

From April 2020 to June 2021, South Africa’s trade balance moved from a deficit of

R36.1 billion to a surplus of R57.7 billion — a swing of more than R90 billion. By the second quarter of 2021, the commodity boom had caused the country’s total tax revenue to improve by 56.2% during the course of a year and the rand appreciated by almost 30% over this period.

The commodity windfall came in handy when, in July 2021, social unrest tore through parts of the country, prompting the government to renew the R350 social relief of distress grant. At the time, Mboweni noted that the nearly R39 billion relief package could be rolled out without jeopardising the government’s fiscal ambitions, but cautioned against future profligacy. 

“As such, our fiscal strategy remains on track. The implementation of these relief measures will not result in a change in the debt trajectory and the fiscal deficit will not exceed the level presented in the February budget,” the then finance minister said during a media briefing.

Commentators were already warning that the commodity boom was papering over the country’s economic problems. 

Global conditions, namely the world economy’s recovery from the Covid-era downturn and constrained supply chains, had conspired to ratchet up commodity prices. Russia’s war on Ukraine extended this hot streak. But, when the commodity cycle proved to be short-lived — and as the South African economy’s frailties became more acute — it became clear that the country’s finances were in a far worse position than initially assumed.

A major problem was that the economy was failing to take full advantage of the commodity cycle, largely because of the ailing port and rail infrastructure under Transnet, state capture’s biggest target. Moreover, austerity’s escalation, in an environment of poor policy and slow reform implementation, meant government spending wasn’t going towards the investment desperately needed to grow the economy.

All this brings us to where we are today: the country’s growth prospects have deteriorated amid intensified load-shedding, as well as Transnet’s continued decline. Financing conditions have also worsened, with the rand continuing to be marked by weakness, even in the wake of high interest rates. Moreover, as the Public Economy Project noted in July, as the terms of trade gains look to be reversed, the cost of external financing for commodity producers will rise.

Meanwhile, trust in the government continues to flounder — a fact that stands to further delay potentially game-changing measures, such as the creation of a sovereign wealth fund.

According to a 2010 International Monetary Fund study, a sovereign wealth fund could have profound benefits for the economy, helping to — among other things — avoid the  undesirable pressures on the exchange rate or inflation, create fiscal space (room for higher spending or lower taxes) or improve the sustainability of the public finances. The assets and liabilities of a sovereign wealth fund can also have a bearing “on the soundness of the balance sheet of the public sector and its solvency and debt sustainability”, the IMF study notes.

Importantly, a sovereign wealth fund would prove invaluable as South Africa makes the transition to a greener economy — a point made by the Alternative Information Development Centre, which has previously proposed using the Government Employee Pension Fund to capitalise such a fund. In helping to fund climate-resilient infrastructure, a sovereign wealth fund would help to avoid the economic pain inflicted by destructive weather events.

The idea of a sovereign wealth fund is, however, a difficult sell, particularly when the spectre of corruption continues to haunt the government’s every move. Ramaphosa’s presidency has failed dismally to assuage fears that the government simply cannot be trusted to manage public money, with members of his administration continuing to sidestep transparency and accountability.

That said, with more economic volatility still to come, a sovereign wealth fund deserves the right hero.