Why now is not the right time for two of Ramaphosa’s plans

By Roxanne Henderson

(Bloomberg) – New ideas are hard to come by, so it was a case of deja vu for many investors when President Cyril Ramaphosa again touted the idea of a state-owned South African bank and sovereign wealth fund.

The desire for the country’s wealth, minerals, land and its banks to be owned and shared by all South Africans harks back to 1955, when the now ruling African National Congress and allies against racial segregation adopted the Freedom Charter. The government proposed a sovereign wealth fund as early as 2010, while plans to form a state bank that will improve access to credit, are yet to get off the ground.

But now is not seen as the right time to push them through. The government’s coffers are all but dry and its debt levels worryingly high. Besides, most state-owned entities are in disarray – their finances plundered after years of corruption and mis-management.

“To actually talk about a sovereign wealth fund in our context really is quite honestly a distraction,” said Cas Coovadia, managing director of the Banking Association of South Africa. “What we’ve got to concentrate on is getting our negative fiscal situation sorted out. It should be taken off the table.”

The National Treasury shot down the idea of a state-owned bank last year, telling Parliament that it would be hard to justify in the absence of major market failures. At least 90% of adults use some form of financial service, the Treasury said, citing a 2018 report by the Finmark Trust. Also, only 1% of South Africans made use of the national post office’s financial-services arm Postbank.

“Government should be getting smaller and reducing SOEs, not creating new ones,” said Chris Eddy, head of investments at 10X Investments.

Ramaphosa is leaving the details to Finance Minister Tito Mboweni when he presents his budget speech later this month.

‘Fiscal exhaustion’

“We question how either of these can be realistically capitalised against the backdrop of weak growth and fiscal exhaustion,” Absa Group economist Peter Worthington said. The inclusion of these proposals in the president’s speech on Thursday was regrettable, he said.

While creating a sovereign wealth fund could be exciting and place South Africa in the same league as Nordic and Middle Eastern nations, the timing is poor, said Peter Takaendesa, head of equities at Mergence Investment Managers in Cape Town.

“The sovereign wealth fund has been proposed for years at this point, but perhaps it is a sign of consistency that the government keeps bringing it up as a priority,” he said. “There are other things that are significantly more important, and that should be further ahead in the queue.”

While South Africa grapples with a moribund economy and 29% unemployment, it is also trying to turn around its ailing state-owned companies. These include its over-indebted power utility, which is struggling to stabilise supply, and its bankrupt airline. The government already owns a development bank, an agricultural bank and a lender focused on industrial projects.

Though Ramaphosa’s speech highlighted the need to re-purpose state-run companies “the decision to establish a state bank, at a time many SOEs are in severe trouble, is inexplicable,” Business Unity South Africa, a lobby group, said in an email. “We must also question what a state bank can do that the private banking sector can’t.”