Prescribed assets: When it defies logic, can it?
The wrongdoing and maladministration over the past few years have left South Africa in dire straits and put us back by at least five years and left the country undercapitalised - so much so that the desperate situation needs desperate action. It is reminiscent of the PW Botha era where the country's economy was suffocated by the dearth of foreign capital due to the apartheid policies.
The government relied heavily on the savings of the country's citizens through prescribed assets in their retirement or pension funds.
The current situation is such that the government debt and those of the parastatals or state-owned enterprises have reached such levels where investors, or potential investors, are very uncomfortable to increase exposure. Yes, this time around South Africa is suffocated by debt.
The goose that lays the golden egg had been and still is in a stranglehold. The fallout of the past few years is manifested by the private sector who was and still is under siege as consumer and business sentiment collapsed due to the inefficiencies in the government and parastatals as witnessed by the cave-in of some of the major construction companies where lawlessness and non-payment by monies owed by government were the order of the day.
The erosion of the tax base and soaring consolidated debt of the government is reflected in the downgrades of the country's sovereign credit ratings to speculative status by S&P Global Ratings and Finch, specifically over the past two years.
It is also feared that a downgrade of South Africa's debt by Moody’s will result in a massive sell-off of South African government bonds as South Africa will drop out of some major global bond indexes.
If the ANC, or the government for that matter, decides to bring back prescribed assets in the hope to source funding for the ailing state-owned enterprises or to counter the possible sell-off due to a downgrade by Moody’s, they have to think again.
Treasury, the minister of finance and President Cyril Ramaphosa and his “A” team are undoubtedly well informed of how disruptive the reintroduction of prescribed assets on a big scale will be on the South African financial markets - bonds, equities, real estate as well as the rand. Volatilities in those markets will be unmanageable.
Worst of it all, it will not make a difference in the consolidated government and SOEs finances as debt ceilings will have to be set and will be closely monitored by global bond market players to ascertain fiscal and monetary discipline. It just does not make sense to shift government and parastatal debt from offshore to onshore.
It should be borne in mind that, at any given stage, the global players can hedge their direct or indirect exposure to South African bonds against adverse situations such as bond defaults. The yield on the South African 10-year government bond is therefore a fair reflection of the country’s political and economic situation.
There are two major factors that differentiate the South Africa as we experience now from during PW Botha’s tenure: the overwhelming support and trust of the nation in President Ramaphosa and South Africa’s support from the other BRICS member states.
There is, however, a place where it is logical to introduce prescribed assets - project-specific or asset-specific bonds. In order to guard against funds earmarked for specific projects being hijacked to fill gaps in other government departments or SOEs it makes sense to issue project-specific or targeted bonds to the public.
We all agree that a cleaner environment must be created. If the way to go is to build nuclear power stations or HELE (high efficiency, low emissions) coal power generation plants, the assets created should be the guarantee for the bonds with the state or SOE the ultimate guarantor.
The project- or targeted bonds should be ring fenced, though. The current SOEs’ debts and track records, those of politicians involved in them as well, speak for themselves. It should be left to the market to determine the pricing of the bonds.
Should you fret about the reinstitution of prescribed assets and move all your financial assets offshore? I am positive that Ramaphosa and his team know that they must do the right thing and that realism will prevail.
The global bond market players agree as South African 10-year government bond yields are in line with South African counterparts in BRICS and Africa given the country's sovereign credit ratings.
In any case, although your liabilities - yes, your future expenses - are in South Africa, historical evidence suggests that a healthy balance of domestic and offshore assets improves the returns achieved in relation to the risks taken.