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Budget 2020: Sovereign wealth fund could diversify, preserve economy

Sovereign wealth funds are a well-accepted national investment mechanism. But the WEF warns of a lack of transparency and governance.

CPI stats sa

Photo: Pixabay

Finance Minister Tito Mboweni will give details about the establishment of a sovereign wealth fund for South Africa in his 2020-2021 Budget Speech later this month. 

This was announced by President Cyril Ramaphosa during the recent delivery of his State of the Nation Address (SONA). The fund would be “a means to preserve and grow the national endowment of our nation”, he stated. 

However, the president did not provide further information, which he said would be given by Mboweni in his budget address to Parliament on 26 February.

SA sovereign wealth fund idea nothing new

A sovereign wealth fund is a state-owned investment fund that is used to benefit the country’s economy and citizens.

The idea of such a fund has been mooted for several years and in late 2019, Mboweni confirmed to the African National Congress National Executive Committee (NEC) conference in Benoni that planning for a South African fund was underway.

According to the World Economic Forum (WEF), a sovereign wealth fund is “simply a mechanism through which countries make investments. A pot of money – often derived from oil or other commodities – that is then invested in shares, bonds, property or other areas of potential growth.”

Many nations use wealth funds to diversify economies

The WEF adds that many of the countries which use sovereign wealth funds have economies that are heavily reliant on one source of income, for example oil revenues in Norway and the Middle East.

“The investments made through the sovereign wealth funds are effectively a way for those countries to diversify and become less reliant on a single stream of income,” the organisation says.

Norway has the world’s biggest such fund, according to the Sovereign Wealth Fund Institute, with assets of more than $1 trillion (about R15 trillion). Abu Dhabi in the UAE is listed as second and China is third.

However, the WEF adds a note of caution by pointing out that some of the biggest funds, with the notable exception of Norway, are not completely transparent about their investments, performance and corporate-governance practices.

“That has led to concern that the investments could be for political rather than purely financial motives,” the WEF warns.

Mantashe: SA offshore gas deposits a rare opportunity 

Addressing Members of Parliament in March 2019, Mineral Resources and Energy Minister Gwede Mantashe suggested that offshore gas deposits found some 175km off the coast by French resources company Total could signal a rare opportunity for South Africa to establish a sovereign wealth fund.

“Transformation is at the heart of everything we do. If you look at the shareholding of the team doing the exploration, only 10% belonged to South Africa. That is why I believe we can intervene in that space by creating a sovereign wealth fund to preserve the benefits of that discovery for future generations. There is nothing more transformative than that,” he said.