Mooted sovereign fund plan could work, but big doubts abound
SA’s push to set up a sovereign wealth fund (SWF) looks like a stretch for a country with few resources to spare, but precedents show that a well-managed seed fund can help attract and focus foreign investment.
In its May election manifesto, the ANC proposed a sovereign wealth fund, but it has said little about its financing and strategic aims. Trade and industry minister Ebrahim Patel reportedly said at the recent G20 meeting in Japan that SA should at once start setting up a fund to prepare for future revenue streams.
SWFs range from intergenerational savings funds favoured by commodity-rich nations, to stabilisation funds to help plug budgetary holes, and strategic funds aimed at powering growth by supporting stateowned firms or bringing in foreign investment. Analysts say SA could choose the latter model, often favoured by governments without oil riches or the net export dollars associated with a current-account surplus.
But some experts are sceptical. “I don’t have an objection to the idea of a sovereign wealth fund per se, just in the SA context I don’t think it is appropriate to be spending our time on it,” said Bureau for Economic Research chief economist Hugo Pienaar. “Given our twin fiscal and current account deficits, we don’t generate excess cash to be channelled to a sovereign wealth fund.”
SA’s economy contracted in the first quarter while its current account deficit widened to 2.9% of GDP. The government expects a budget deficit of 4.5% of GDP for this fiscal year. SA relies on foreign portfolio inflows to finance the twin deficits, which widened in recent years and are seen as economic weakness. Mining, the most likely source of revenue for the fund, generates about 8% of GDP, less than half of what it contributed in 1980.
“Should a fund be launched without clear objectives, and be financed by significant debt, that would be ratings-negative if it struggled to keep the country’s fiscal position on track,” said Rachel Ziemba, founder of Ziemba Insights.
SA has just one investmentgrade credit rating left, and is worried that losing it will lead to big outflows of foreign investment. If SA does opt for a strategic fund, it could look like those set up by India, France and Italy to entice foreign cash to enhance
limited domestic firepower and funnel investment into local firms or infrastructure. Long-term investors — often other sovereign funds or private equity — are attracted by the perceived lower risk and access to the juiciest state assets.
“India’s fund has been successful in galvanising investment, and could serve as a good example for SA if the government can find an initial capital contribution,” said Victoria Barbary of the International Forum of Sovereign Wealth Funds.
India’s National Investment and Infrastructure Fund invests in roads, ports, airports and power. Backers include Abu Dhabi Investment Authority, Singapore’s Temasek Holdings and Indian banks. It oversees an India-focused fund-of-funds to which the Asian Infrastructure Investment Bank is committed.
The Russian Direct Investment Fund, established in 2011, has become the main conduit for foreign investment into Russia, with its importance rising as US sanctions bite Moscow.
Barbary said SA could draw on the experience of the Public Investment Corporation (PIC) to help build investment teams able to identify opportunities.
With blackouts and Eskom bleeding money, SA’s creaking power industry would seem a potential starting point.
A problem with that is that any such fund could duplicate the work of institutions such as the Industrial Development Corporation and Development Bank of Southern Africa, said Coronation Fund Managers portfolio manager Neville Chester.
“Very few foreign investors are going to commit real foreign direct investment (FDI) — a lot of our FDI tends to be portfolio flows rather than building factories, creating jobs — without certainty on wider government policy. Unfortunately that’s where we have a vacuum.”
Governance concerns given corruption allegations against state institutions such as the PIC and Eskom and former president Jacob Zuma, might also put off investors.
VERY FEW FOREIGN INVESTORS ARE GOING TO COMMIT REAL FDI WITHOUT CERTAINTY ON WIDER GOVERNMENT POLICY