ALLAN GREENBLO: IMF loan could spark a seismic shift in SA’s politics
As in 1989, the country’s choices in 2020 are confined by the anticipation of bankruptcy
Whenever this ANC government announces an initiative, it’s quickly followed by incredulity. Not without good reason: it’s a scepticism provoked by long experience of promises designed to deceive, or policies destined to fail.
Why should this time of Covid-19 be any different?
Well, there is potentially one reason: SA’s choices are confined by the anticipation of bankruptcy. As happened previously in SA, when the fiscus was blown, economic sovereignty and political fantasy become subservient to the bond markets.
That was in 1989, when the sanctions-induced deprivation of foreign exchange significantly tipped the government of FW de Klerk to commence the abandonment of apartheid. The right-wingers in the ruling National Party were defied.
Today, more than three decades later, rating downgrades to junk status caused by a decade of endemic corruption has created an urgency to attract foreign exchange, forcing President Cyril Ramaphosa’s government to contract with the market-oriented International Monetary Fund (IMF). Left-wingers in the ruling party, of statist inclination, had better be defied.
If they aren’t, Ramaphosa will stagger and stumble under the weight of demands, and the populist consequences will become eerily predictable: raids on people’s savings, tax increases that stimulate capital flight, exacerbated rand weakness and overworked Reserve Bank printing presses.
In the same way that February 1989 sparked an ideological shift of seismic reverberation, so too can the IMF sign-up in July 2020 do much the same to clichés that masquerade as weapons to attack poverty, unemployment and inequality.
SA’s economy still has positives — not least of which is finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago, respectively representing the National Treasury and the independent central bank.
Both are curators of orthodox fiscal and monetary policies, informed by prudence, not grandstanding. Their sobriety is consistent with the IMF principles of marketplace deregulation and competition — even if this is the precise antithesis of central command that continues to find favour in the ruling party.
That much is illustrated by the power-drunk dictates of the national coronavirus command council. Its contradictory extremes are hostile to business, with which the government says it wants a social compact. The council’s rules have also served to diminish the tax base the government relies on, frighten the capital investment which the government urges, and obliterate jobs capable of retention.
Let’s be clear: the $4.3bn IMF loan, at nominal interest and minimal conditionality, is an act of generosity to help SA through its most immediate Covid-19 setbacks. How that money is disbursed will be watched before the next tranche, much bigger and more onerous, is inevitably requested within a few years to help SA through a foreseeable balance-of-payments quandary.
Until then, Mboweni is fortified in his budget promises. He’ll be monitored for implementation of expenditure ceilings, and on whether he succumbs to life support for decrepit state-owned enterprises (SOEs).
The IMF (unlike VBS Mutual Bank, with which certain politicians are familiar) prefers an environment that will allow for repayment of its loans.
The pensions factor
So what does this have to do with pension funds?
Pretty much everything: these funds are the targeted money pots for the surge in new infrastructure projects intended to trigger economic recovery. It makes conceptual sense.
The long-term nature of pension fund liabilities corresponds to the long-term nature of infrastructure returns, and there are loads of assets in pension funds which could be better directed into supporting SA’s real economy.
But here, neat theory bangs up against tough reality:
- The fundamental purpose of pension funds is to provide for pensions. The better the investment returns, the better it is for people’s retirement. Fund trustees who knowingly or negligently pursue suboptimal returns are in breach of their fiduciary duty to fund members, and expose themselves to civil liability.
- Infrastructure projects offered for pension fund investment will need to compete on risk and return with other market opportunities. Introducing prescribed assets would do exactly the opposite: force a proportion of pension funds’ assets into uncompetitive returns.
- Prescribed assets would also represent the failure by the state to attract investment on a market basis, which is hardly a signal of confidence likely to woo foreign investors.
- To encourage contributions to pension funds, which would then be prescribed to invest in state assets, the government would likely have to offer tax incentives. But this would be absurd, and self-defeating: incentivising contributions on the one hand, while cancelling their effect by prescribed assets on the other.
- In response to Covid-19, the Business for SA (B4SA) private sector group calculates that R3.4-trillion of baseline funding will be needed over the next three years “to deliver an accelerated economic recovery strategy”. This amount approaches the total assets in private sector pension funds. So whatever amounts they invest will have to be bolstered from other domestic sources and from institutions abroad. Few of these overseas funders are likely to be impressed by returns predicated on prescribed assets.
- In June, under the auspices of the presidency, a symposium was held via Zoom on sustainable infrastructure development. After the symposium, a list of 55 mega-projects was produced. Subsequent to the symposium, nobody is any the wiser as to their respective costs, prioritisation and timeframes to completion.
- Nobody is any the wiser, either, on whether prescribed assets will be introduced for the funding. On this issue, Ramaphosa’s silence is deafening.
- During that symposium, none of Ramaphosa’s obsequious audience thought to ask whether investments by pension funds might enjoy government guarantees, whether the state element in public-private partnerships had the necessary capacity to play the implementation roles envisaged, and whether transformation quotas could be impacted by heightened demand for technical skills.
- Meanwhile, due to Covid-19 following years of lacklustre performance of the SA economy, pension funds are vexed. For the past five years, generally speaking, returns have been minimal and failed to beat inflation. When savers aren’t seeing real returns, they start to question whether they should be saving at all.
- Employers, reduced to survival mode, will be questioning whether they still want to offer a pension fund to employees. If they do, their next question will be whether they can sustain their present levels of contributions.
- For employees, facing devastation from lost jobs and salary cuts, their pension is often all that stands between them and penury. It then becomes a race between recovery in the jobs market or their money running out. At least, for a while, they have a stop-gap that demonstrates the value of having saved. But that’s little consolation for the Treasury or for financial institutions, as their customer base shrinks.
So here are two modest suggestions for Ramaphosa.
First, declare his position on prescribed assets, so that it’s clear whether portions of pension fund assets are at risk of expropriation without compensation.
Second, crack down — and I mean really crack down, without favouritism — on corruption, which is quite brazenly out of control.
SA has never previously been as desperate for investment, both domestic and foreign. The good news is that there’s plenty of it, potentially, provided that SA is seen as a safe destination financially and physically.
An inert Ramaphosa has done little to make it so. The IMF support has arrived in time to light a fire under his feet.
- Allan Greenblo is editorial director of Today’s Trustee, a quarterly magazine mainly for the principal officers and trustees of retirement funds
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