South Africa is poised to throw the baby out with the bathwater by prescribing assets – even more than currency – to ensure that the state-owned enterprises are bailed out with public and private pension money. Or is it? Economists Mike Schussler, of Economists.co.za and Ian Cruickshanks, of the IRR believe earnestly that this is the way the ANC government is heading, but JP Landman, the Nedgroup Private Wealth political economy analyst, says there is no way this is going to happen – there is plenty money in the local and international market to mop out the withdrawals by foreign investors. Pan African Investment and Research Services chief executive Iraj Abedian agrees with Landman, and says he would be “shocked out of his boots” if Tito Mboweni goes along with it. Donwald Pressly looks at the debate.
By Donwald Pressly*
President Cyril Ramaphosa has made it clear that he supports the resolution taken at the 2017 elective ANC conference for prescribed assets on pension funds to be “investigated”. Enoch Godongwana, the head of the ANC’s economic transformation sub-committee has also proposed that the country considers using private and public pension funds to bail out struggling state-owned enterprises – and to avoid an International Monetary Fund bailout.
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The most recent high-ranking official in government to support prescribed assets, which many economists – and pensioners – view as theft, is SA Communist Party leader (and Higher Education Minister) Blade Nzimande. Speaking at the ANC’s 108th annual January 8 anniversary celebrations in Kimberley, he said his party – which is part of the ANC alliance – would continue to support the ANC provided it continued to embrace “communist values”. Quoted in the South African, he said: “We need a radical change to our economy… like Cosatu… we want expropriation of land without compensation. We want workers’ pensions and provident funds to be used to build the manufacturing base of our country so as to create jobs… and not to fund vanity projects that serve the private interests of the few. We want prescribed assets.”
So it seems we are at great risk of going down this route at least rhetorically. According to economist Mike Schussler, the question is only when. Schussler is a gladiator against strengthening Regulation 28. But he believes that it is now only a matter of time before Treasury caves in. It probably won’t be in the February budget, but it could follow a downgrade by Moody’s – the last hold-out rating agency – to junk status. This could happen in March or November. Some analysts put it later, sometime in 2021. But Schussler believes the clock is ticking fast. “There is no need to pass a law or go through parliament. Regulations can be changed by the Minister (of finance).”
At the moment this regulation of the Pension Fund Act limits the extent to which retirement funds may invest in particular assets. At the moment underlying portfolios are limited to 30% in foreign investments – something which could be reduced. A new requirement to invest in SOE bonds – like Eskom – could be introduced.
Read also: Investors warn SA: Don’t force us to invest in state projects – prescribed assets furore
The problem that the Treasury faces is that if junk status is implemented, certain institutional investors – mainly USA and European pension funds – are proscribed from investing in SA debt instruments. Moneyweb explains it well. If Moody’s downgrades SA’s rating, SA rand bonds will be excluded from the FTSE World Government Bond Index. It could mean a sell-off of at least $10bn (about R150bn). The rand could weaken considerably. Treasury would then argue that our pension fund industry – which is worth about R4trn – needs to invest in “developmental” projects, such as Godongwana has suggested, boosting its coal industry – which feeds the ever-hungry Eskom. Read Eskom bonds. Schussler estimates that SOE debt, including Eskom is about R800bn with the state power monopoly holding about R450bn of it. He believes that the government is going to go for this pot.
What will happen then? How would pensions and the economy as a whole be affected? Cruickshanks said the Government Employees Pension Fund – the biggest pension fund in the country by far and which is managed by the Public Investment Corporation – is a defined benefit fund. So if it is forced to buy many more bonds, particularly in Eskom, its pensioners will not be immediately affected – because they get fixed pensions, guaranteed by the State, for what that is worth. But the private pension funds would also be forced into this. There it has a multiplicity of impacts: It reduces the flexibility of pension investments even further. People simply won’t want to contribute to private pensions. Where they can they will leave these instruments alone. They would turn to other investment destinations, including outside the country.
PREMIUM: Andrew Canter: Prescribed assets a blunt tool to shield bad governments
Nedbank chief economist Dennis Dykes said that foreign investor appetite would be driven away even further.
Iraj Abedian says he doesn’t believe that Finance Minister Tito Mboweni will take such a foolish decision. The minute an announcement on prescription is made, all existing pension fund holders – public or private – will be poorer “by virtue that you are forced to invest in that (bonds).”
Those in government who believe that the economy would be reignited by plugging many billions – about R800bn is needed – from pension funds into SOEs are living in cloud cuckoo land. “All the members of a pension fund are instantly poorer the minute the announcement is made. There is no two ways about it.”
Arguments about the state pension funds being guaranteed would ultimately be rendered meaningless because the state is broke – look at Zimbabwe, says Abedian. “The economy is not going to be reignited by putting money into broken buckets.”
If the prescription forces win, the rand would instantly go into a tail spin, says Abedian. The nation as a whole would be instantly poorer. It would kick-start a long-term recession. “That (prescribed assets’ bailout) money is not going into the South African economy… it goes to creditors who have been nagging to get their money back.”
Abedian says he would be “shocked out of his boots” if Mboweni changes the law – Abedian believes a change in the Pension Fund Act is required rather than just a regulation change – to prescribe investment in the state bond market. If Mboweni caved in, workers would rise up and revolt. Abedian believes Cosatu’s support of prescribed assets was a leadership thing. “The leadership is unable to understand the full implications (of prescription)… but there is nothing better to unify workers than an attack on their pensions.”
He could see (former Finance Minister) Malusi Gigaba signing such a change, believing it would empower the workers. “Anyone who doesn’t understand finance will sign it.” But the current leadership of Treasury including Mboweni and his DG would not support it, he says.
JP Landman says that there is plenty of money in the market – outside of the pension funds – to buy up government bonds. SA institutions were doing it right now and would continue to do so. While he acknowledged that there had been a drop in appetite by foreign institutional investors with the threat of junk status, they still “love the South African bond market”.
Landman said it was easy for investors to move capital in and out of SA, which compared to the US and Europe was a high interest rate environment. This was liked by pension funds because of the high investment returns. He didn’t think SA would mess with this. Since SA liberalised its capital market during apartheid in the 1980s – when prescribed assets by state pension funds were abolished – “government has never had a problem raising money”. The USA had a debt to GDP ratio of 200%. China stood at 100%. The UK was at about 90%. He did not believe there was a tipping point where this debt became unsustainable to service.
But Schussler is adamant. He argues that high debt service costs, a growing budget deficit all pointed to prescribed assets. “Pension funds are an easy pot to fill a hole.” The pension fund pot was about R4.4trn while banking had just two trillion available with voluntary investments just R400m or so. “Once we are in junk status … the cost of capital goes up,” says Schussler. Upon junk status, Index funds will withdraw from SA requiring funding of about $18bn. And that will be just the start.
Foreign portfolio investors made up about 40% of SA debt market at present. With junk status government will need funding even more, debt will grow more expensive and it will fuel the need to issue bonds. “The local pension assets are a very easy target when all you have to change is… the regulation.”
The debt burden along with SOE debt is now heading towards 100% of GDP, he says. In 2008, the year after President Thabo Mbeki lost to Jacob Zuma, it was 46%. Government keeps on breaking its promises on debt levels. “Remember the statement that SA will not have a debt to GDP ratio of more than 40% to GDP?”
He argues that SA is rapidly reaching a critical point. “We are heading… where the demand and supply dynamics will change in the total public debt market. Pension assets buy government time. A country ‘bailing’ itself out is not just a possible concept but something we who want a future should fear.”
But Schussler thinks SA is well on the way on this route. Dykes, however, says it is not clear whether the government will do it, but it would send “absolutely the wrong signals”. To attract money to the SOEs, like SAA, you need to let the bond yield go up. The state-owned sector should be reformed to allow it to attract capital.
Russell Lamberti, founder of investment advisory firm ETM Macro Advisors, said throwing money at Eskom, for example, would be “funnelling it into a black hole”.
The prudent course would be to reform the energy sector in three steps. “Fully privatise energy such that anyone can produce it and sell it into any municipal network. Engage in radical cost cutting at Eskom by shedding staff and inviting a standoff with the unions which the state has the resources and power to win. Once Eskom’s costs have been rationalised, sell it off in stages to willing buyers.” These buyers would assume Eskom’s liabilities and remove the fiscal burden off the state’s balance sheet.
But he doesn’t rule out a rash decision. Political ideology could get in the way of these reasonable reforms “but then we are simply saying that present ANC ideology is, indeed, imprudent.”
- Donwald Pressly is a political economy analyst. He has reported on South Africa for 30 years.
Comment from Biznews community member LJ Botha:
Good morning Alec
Before this discussion is taken further, we need to tell Parliamentarians that they should not be allowed to prescribe where normal people’s pension funds should be invested, while their own pension actually comes from the taxpayers’ money. The reason I am saying this, is that there is no way that the parliamentarians can have full pension after one full term in Parliament, and have contributed to a pension fund to which we all contributed all our working life.
Therefore they do not have the right to make such a decision, and they should only be allowed to make such decision when they also derive their pension from pension funds to which they have contributed all their working careers.
The same goes for NHI – if Parliamentarians have to go to public hospitals (no private hospitals), then they will see the dire situation in which the people has to be treated and then ensure that the public health system be upgraded before we switch over. Only when public health become the preferred route, the switch-over would take the country forward.
It is interesting that this angle is not punted at all.
Kind regards
LJ
