South Africa’s stringent lockdown has so hurt the poor – including the hundreds of thousands now newly jobless or otherwise unable to work – that the government is urgently casting around for billions of rands to help support them.
But the fiscal cupboard is almost bare, while public debt is already inordinately high. All of which makes the country’s pension pot – the 4th biggest in the world as a percentage of GDP – a particularly tempting target for the government to tap for its stimulus package.
South Africa’s pension funds, both public and private, are valued at close on R4 trillion, even after the recent market carnage. More than 11 million South Africans of all races (72% black, 28% white) contribute to these funds or draw from them after reaching retirement age.
Taking families into account, the country’s pension funds benefit some 33 million people – or more than half the population, as Mike Schussler, head of Economists SA, pointed out at an IRR media briefing earlier this week.
Yet big business, according to a recent report in the Daily Maverick, seems willing to work together with the government in ‘raiding’ the country’s pension funds – both public and private – to help provide relief for the massive economic damage from the lockdown.
‘We need to be raiding resources wherever we can find them,’ said Busa president Sipho Pityana at last Friday’s meeting of the National Economic Development and Labour Council (Nedlac), called to discuss a stimulus package.
Private sector savings
At this meeting, investment banker Martin Kingston assured the government and Cosatu that the business community was already identifying what ‘reserves were available’. The meeting also discussed how ‘funds from SA’s private sector savings (including pensions) and investments, which are estimated to be worth about R8-trillion’ could be ‘mobilised for the stimulus package’.
Mr Kingston stressed that adequate returns on such savings would need to be maintained. But this caveat is likely to count little if ‘the government opts for directly using private sector savings and investments’, as Mr Pityana and Cosatu spokesman Matthew Parks seemed willing to propose.
Though Mr Pityana also expressed a need for caution in ‘using public and private savings’, this too will mean little if pension funds are forced to invest in government and SOE bonds at artificially low rates – and with little guarantee that their capital will not be frittered away.
The R500bn stimulus package unveiled by President Cyril Ramaphosa on Tuesday evening makes no mention of tapping into pension funds. But it is also singularly unclear on how the necessary funds are to be found.
A R90bn ($4.2bn) loan will be sought from the Covid-19 relief funds of the International Monetary Fund (IMF), at an interest rate of round 1%. Since this loan, if approved by the IMF, would come without conditions, the tripartite alliance is willing to sanction it. Additional loans from the World Bank, the New Development Bank, and the African Development Bank could bring the country’s total borrowings from international finance institutions to about R100bn.
But that is far short of the R500bn the president has promised. Another R130bn is to come from rebalancing the budget, but that will be hard to do when finance minister Tito Mboweni barely scraped together R260bn in savings over three years in his February 2020 budget. Hence, most commentators doubt whether rebalancing will be achieved.
But even if the R130bn can indeed be reallocated, a major funding gap will still remain – and no clarity has been provided as to how this will be filled. More state bonds may need to be sold, but demand might not suffice (despite yields exceeding 10%) while the costs of borrowing in this way (given these high yields) could be enormous.
Annual interest payments on public debt could rise in three years from 4% of GDP, as now, to 9% of GDP or more. Current interest spending, at 4% of GDP, is much the same as this year’s budget for public health. At 9% of GDP, however, the interest burden will increasingly squeeze out spending on all other vital needs.
But the government will be reluctant to keep trimming the public service wage bill or to reduce its spending on social grants. As part of the stimulus package, that spending is also to be increased by R50bn, albeit as a temporary measure. But the Treasury fears (and with good reason) that temporary increases to existing grants – along with a monthly (R350) social relief grant for more than 10 million jobless people for six months – will in practice prove impossible to end.
How then is all the extra money for the stimulus package (and post-Covid poverty relief) to be found? According to Mr Schussler, a further R300bn could be obtained from the IMF by taking advantage of South Africa’s ‘special drawing rights’ or SDRs.
SDRs are the reserve assets created by the IMF to supplement the official reserves of member countries. Though South Africa has only about R30bn in SDR holdings, during the 2008/09 global financial crisis the IMF allowed member countries to access between six and seven times their SDR holdings.
Given the scale of the current Covid-19 crisis, the IMF is now considering allowing member countries to access ten times their SDR holdings. If this is agreed, it would allow South Africa to access some R300bn. The interest payable would again be low, at around 1%.
National democratic revolution
A crisis of the magnitude that Covid-19 has unleashed needs to be dealt with at the international level, as Mr Schussler says. But the ANC has little interest in pursuing this option because of its long-standing commitment to a national democratic revolution (NDR) aimed at taking South Africa from a capitalist to a socialist (and ultimately a communist) future.
A particularly important NDR objective is to ‘mobilise…the immense resources…controlled by…private capital’ into serving the needs of the revolution, as the SACP states in The South African Road to Socialism. How this is to be achieved will ‘vary according to circumstance’ and will often depend on ‘effective state…regulation’. It may also require ‘straightforward compulsion and even expropriation’.
One way of ‘mobilising’ the private sector’s ‘immense resources’ is to introduce prescribed assets for pension funds, which would then be compelled to invest stipulated percentages in government and SOE bonds at interest rates set by the state. The ANC has long wanted to do this, as is evident from its 2012 policy documents, its 2017 national conference resolutions, and its 2019 election manifesto.
Now the Covid-19 crisis – and an unnecessarily stringent and prolonged lockdown – have given the ANC/SACP alliance the chance to achieve this long-standing ambition. The crisis has also reduced the need for compulsion, as big business seems more than willing to tap into the country’s pension funds to help provide relief.
The prescribed asset option is easy to implement, moreover, which makes it all the more attractive. This can be done by amending Regulation 28 (issued under the Pension Fund Act), which already allows the government to give directions as to how pension funds are to be invested.
Relatively small step
Under Regulation 28, pension funds must currently invest 25% in interest-bearing investments, such as bonds, even if their members would prefer a higher equity exposure. It would thus be a relatively small step to amend Regulation 28 to require, say, a 50% investment in state bonds. Since shifts in regulations do not generally need legislative endorsement, Parliament could be left out of the process.
Initially, these state bonds might be issued at an interest rate mirroring the inflation rate: currently about 4%. But, as Mr Schussler has pointed out: ‘Later, bonds could be issued at inflation minus 3%, while our retirement savings would be used to bail out [the failing state] for the umpteenth time. The looting and the waste would continue – and pensioners would bear the costs.’
The potential blow that could be visited upon the 33 million South Africans with accumulated pension benefits is massive. All will suffer greatly, regardless of their race. However, since most of the individuals affected happen to be black, the upshot, as Mr Schussler warns, could be ‘a huge destruction of black assets, the worst the world has ever seen’.