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'Divert pensions to stave off IMF'

18 Aug 2019

AIPHUS KGOSANA / Journalist, Sunday Times

ASHA SPECKMAN / Journalist, Sunday Times

Article

ANC eyes R6 trillion controlled by asset managers as a better option than a bailout

The ANC's economic policy guru has re iterated the party's desire for the government to raid private and public pension funds to raise money to rescue ailing state owned enterprises SOEs and meet its financial obligations.

Enoch Godongwana, head of the party's economic transformation subcommittee, said the asset management industry, which includes pension funds, insurers and other investors, is sitting on R6 trillion under management and should lend some of this to the state. He said this was a better option than approaching the International Monetary Fund IMF or World Bank for a bailout.

"Why would you go to the IMF and the World Bank and go and raise money when we have sufficient savings in the economy which you can borrow, probably far cheaper, and probably with little exchange rate risk?" he said in an interview with the Sunday Times last week.

Godongwana said while the ANC investigation into prescribed assets was ongoing, his wish for government to raise money from pension funds was not a pronouncement on the prescription of assets through legal means. "Borrowing from domestic markets is not prescribed assets, that is a separate investigation," he said.

Zingiswa Losi, president of Cosatu, said: "If government is going that route it will be better than us going to the IMF, which would mean our sovereignty as a country is also at risk. What we want to see is assurances that the money is going to be used for its intended purposes and not corruption, and there will be guaranteed returns."

Opposition
Asset managers are opposed to asset prescription, which would compel entities such as pension funds to invest a portion of their savings in SOEs and government bonds.

Leon Campher, CEO of the Association for Savings and Investment SA Asisa, said that "prescribed assets would force the savings and investment industry to deploy the savings of ordinary South Africans into entities that have over the recent past been mired in state capture and lack of delivery. As custodians of these savings we have to oppose this."

He said prescription would see the industry investing in high risk entities that yield low returns, which would erode the value of those investments over time.

"Prescription would also have a negative impact on the country's credit rating," Campher said.

Sygnia CEO Magda Wierzycka said there are two possible pools of funding that the government could consider before approaching the IMF. The first is the R2tril lion that the Public Investment Corporation PIC invests on behalf of civil servant pension funds, as well as unemployment insurance monies and the like. This could be used to buy Eskom bonds, which would assist Eskom to cut its R400bn debt and stem the drain on public finances.

The other option is more contentious and was a route the apartheid government took when it was ostracised financially by the rest of the world. It passed a law that stipulated pension funds had to invest in state entities.

When the ANC came to power in 1994, it abolished this law and replaced it with regulation 28 of the Pension Funds Act, which caps the amount of offshore investment allowed by such funds to 25%, with 10% to be invested in the rest of Africa.

Quid pro quo
Wierzycka suggested that the government review this regulation and allow for 40% offshore investment. In exchange, "you invest 20% of your pensions and savings in government debt. Given that SA has to pay relatively high interest rates in order to attract lenders, it's not unattractive, provided that there is no default on debt repayments by the government."

However, these options would have to be deployed "in a very stringent framework with other compensation and risk controlling mechanisms and independent monitoring so that the money isn't squandered".

Wayne McCurrie of FNB Wealth and Investments said that while he was not advocating asset prescription, that option was better than going to the IMF for a bailout.

"If things get so bad that your choices are either IMF or Eskom goes bankrupt, or prescribed assets, what's the worst? The worst one is not prescribed assets," he said.

McCurrie said if this became law, the prescribed threshold would not be more than 5% of assets that fund managers would have to invest in SOEs and government bonds. "If 3% of your pension fund, including government pension funds, is invested by law in an unproductive asset, is that worse than going to the IMF, or Eskom going bankrupt and being unable to keep the lights on?" he asked. 

Andrew Canter, CIO of Futuregrowth Asset Management, said compelling pension funds to invest in national development was unnecessary as there was no shortage of money for that.

"If there are enough investment opportunities, well structured, well-considered infrastructure projects, government schemes, government plans or SOEs, there is plenty of money to fund them as there always has been. SOEs, when they are well run, can access finance in large size."

Prescription is dangerous and would be very disruptive to the way capital markets, which are a national asset, work, he said. "We're very hostile to prescription, we think it's a terrible idea."

He said current regulations compel pension funds to invest 75% of their assets in the country. "That means 75% of the money of pension funds is in the country and ready to invest in SA. How hard is that?"

Fears of an IMF bailout and prescribed assets come as an increasing number of business leaders warn of the distress SA's economy is in.

Sipho Pityana, president of Business Unity SA, last week warned of the fallout of any IMF bailout, which would come with onerous conditions, such as those imposed on Greece, where thousands of jobs were lost after it sought aid. "We shouldn't be under any illusion ... that the spectre of an IMF is very, very real unless we actually rein in our costs ourselves," he said.

Nedbank CEO Mike Brown said business leaders need to speak out "to try create an environment where we do implement the changes that are required, and take the medicine ourselves to step back from the fiscal cliff as opposed to crashing into an IMF bailout, which will be significantly more painful for all South Africans".

A former senior government official said a default on debt by any of the major SOEs, such as Sanral or SAA, could trigger lenders calling in their loans, leaving the government scrambling to find the money quickly.

But with the ANC worried about the loss of sovereignty that would come with an IMF bailout, “I can tell you it would never be an easy decision. There is an aversion in ANC circles to an IMF programme or help.

"Even JZ Jacob Zuma, he understood that's the lowest point you can reach as a country. In his carelessness and recklessness, he knew that point is a no go area."

No magic bullet
Reserve Bank governor Lesetja Kganyago said in an informal briefing with the media last week that SA "is not there yet" in terms of requiring IMF aid. "The IMF is so terrible," he said. "They give the patient such terrible medication that the patient dies. Only if the patient ate the vegetables, they wouldn't need to take the medication."

By the time a country has debt problems or balance of payment challenges, when it is unable to fund its imports, "it may be that it has not eaten its vegetables you didn't contain expenditure, you didn't take adequate measures on the revenue side, you allowed your fiscal deficit to run, you allowed your central bank to finance the deficit and monetise that deficit and in the process inflation had gone up, you allowed external imbalances to build up," said Kganyago.

Bloomberg reported that the IMF doesn't see a balance of payments problem in SA meaning there's no need for IMF support.

Wierzycka said: "My biggest concern is who is applying their minds about what we should be doing? We don't have an economic think tank. We have a government focused on internal factional fighting."

Pityana said the over-indebtedness of SA's public sector continues unabated with banks "coerced" to extend more loans to state entities, including the government. "Already banks in SA have an exposure of about R1 trillion to the South African state entities and the public sector in general."

He said there was a risk that banks may stop lending or increase interest rates on loans to the government as they try to comply with the prudent lending standards set by the Reserve Bank.

Decisive action at SOEs is necessary.

"You're beginning to hear people talking about salaries not being paid, the SABC not being able to supply good programmes, all of this has the hallmarks of what we saw in Greece and in other countries."

Asked how long he thinks we have before an IMF bailout is the country's only option, Brown said: "When people go bankrupt or run out of money, which is effectively the issue from a state point of view, it happens very slowly for a long period and then suddenly very quickly at the end.

"SA still has sufficient window to deal with its problems, but we can't kick the can down the road any longer."

Canter said: "There is no magic bullet with prescription, there is no magic bullet with the IMF, there is no magic bullet from anywhere except to run the government better."

All tags:

IMF / prescription