S Africa’s Ramaphosa proposes new sovereign fund

JOHANNESBURG: South African President Cyril Ramaphosa has proposed setting up a sovereign wealth fund to help boost economic growth, and his ruling African National Congress (ANC) backs the plan, two senior party officials said yesterday. Ramaphosa, who replaced scandal-plagued Jacob Zuma as ANC leader late last year, is trying to rekindle growth before next year’s national election.

There were no immediate details on where the money for the fund would come from. Most sovereign wealth funds utilise revenues from oil and gas exports. South Africa does not have significant energy deposits but has a large, albeit struggling, mining industry.

The idea of setting up a sovereign wealth fund, which other emerging markets such as Russia use to lift growth at times of weak commodity prices, was dropped by South African officials several years ago when commodity prices plunged. “We support the idea, put forward by the president, of the creation of a sovereign wealth fund,” ANC Deputy Secretary General Jessie Duarte told reporters on Tuesday.

“It’s another mechanism to ignite our economic prospects.”

South Africa’s economy has performed poorly this year, despite a short-lived pickup in business and consumer conference around the time that Ramaphosa replaced Zuma as ANC leader.

Economists are skeptical that South Africa - a major producer of commodities such as gold and coal - could easily set up a sovereign wealth fund given its large budget deficit and shrinking mining sector.

Zizi Kodwa, a member of the ANC’s National Executive Committee, told Reuters that it would be government that would decide which revenues to use to set up the fund.

“South Africa has a lot of mineral wealth, but it’s not up to the ANC to decide where to take the money from,” Kodwa said. “A sovereign wealth fund could be an important source of stimulus, that is what we are saying.”

Rand falls

South Africa’s rand plunged more than 10 percent to a 2-year low against the dollar and government bonds weakened sharply as a renewed rout in the Turkish lira spread to other emerging markets. The rand, which later recovered to trade down 1.6 percent against the US unit by 1500 GMT, is one of the most deeply traded emerging market currencies, making it susceptible to swings in sentiment on global markets.

The magnitude of the rand’s slide came after three days of heavy losses and caught the South African Reserve Bank by surprise, but a deputy governor at the bank told Reuters that the regulator was “nowhere near” intervening to support the currency.

Highlighting South Africa’s narrower current account deficit and smaller stock of short-term external debt than Turkey, analysts said investors should not be overly concerned by recent rand weakness.

“The rand is currently telling us a lot more about general emerging market sentiment than it is about South Africa in particular,” said John Ashbourne of Capital Economics.

“The rand is likely to rebound in the short term as the situation in Turkey stabilises,” Ashbourne added.

The yield on South Africa’s benchmark government bond maturing in 2026 rose 19.5 basis points to 9.050 percent, reflecting weaker bond prices.

The average yield premium to hold South African debt over safe haven US Treasuries rose to 303 basis points (bps), having added more than 30 bps in the past week. The lira has lost more than 40 percent of its value this year on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States.