Business

Good idea, but where is the cash for a wealth fund and state bank?

2020-02-16 18:10

The state bank and sovereign wealth fund that government wants to establish will struggle to make headway in the face of dire budget deficits, a mountain of state debt and scant economic growth.

So said economists, who were commenting on these proposals after President Cyril Ramaphosa’s state of the nation address, delivered on Thursday.

The president announced that government had decided to establish a sovereign wealth fund in order to protect the country’s “national endowment”.

Such funds are relatively common in countries that are rich in resources such as oil or minerals, and where big surpluses result from the income derived from such resources.

During his speech, Ramaphosa also announced that government would continue with its plans for a state bank, meant to ensure that all South Africans have access to banking services.

The idea of a state bank is not new – it was one of the resolutions that the ANC adopted at its policy conference in 2017.

Ramaphosa did not reveal further details, saying these issues would be addressed in Finance Minister Tito Mboweni’s budget speech on February 26.

However, economists are sceptical about the feasibility of these plans, given the poor fiscal position South Africa finds itself in.

Johan Gouws, head of advisory services at Sasfin Wealth, said he did not know where the money for these initiatives would come from.

“We have Eskom, state debt and a budget deficit that is approaching 7% of GDP,” he said.

Many South Africans may also be less than enthusiastic about a state bank or wealth fund in circumstances where rampant corruption remains unaddressed and the financing of these initiatives remains unclear.

“Corruption in our country is so endemic at present and something like this [a state bank and sovereign wealth fund] could be just another opportunity for misappropriation.”

Christie Viljoen, chief economist at PwC, said South Africa was not comparable to countries such as Norway, which has rich oil deposits, or Botswana, with its diamonds.

Both countries have sovereign wealth funds that are managed effectively.

“In South Africa, mining is no longer as dominant. We cannot say that our gold mines, for example, would be able to finance such a fund,” he said.

“The money will have to be found somewhere, and this while we have a budget deficit.”

In respect of the proposed state bank, Viljoen said there were many innovative ways to extend services to people who were not yet part of the banking system – so-called unbanked people.

He pointed out that there were many new banks in the industry, with much lower banking costs.

“But bank services cost money. You cannot deliver them for free.”

A state bank would, in essence, involve a government institution delivering services at a discount that the state could not afford.

Kevin Lings, chief economist at Stanlib, said ideas pertaining to a state bank and sovereign wealth fund were still a way off.

“It costs money to set up these kinds of things. And who is going to manage it? What would the mandate of a bank like this be? And who is going to be held responsible if there are losses?”

There were just as many questions about a sovereign wealth fund, he said.

The question is why government cannot achieve its goals through existing institutions, such as the Industrial Development Corporation, the Development Bank of Southern Africa or the Land Bank.


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March 29 2020