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ECONOMY: Economy-boosting Long-term Domestic Capital Allocation is What South Africa Really Needs!


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I'VE READ many a thought piece and listened to many a speech from sections of government and the private sector alike about radical economic transformation. This quarter I’ve decided to weigh in on the issue and present my own views as a concerned but progressive South African and financial services practitioner. The latest thought piece I’ve read around this issue talks to other radical action that is required in our economy such as radical reduction of unemployment, radical elimination of poverty and radical reduction of inequality. The economist that penned this piece estimates that in order to achieve the first of these issues will require continuous real GDP growth 6% above the current levels for a sustained period of at least 10 years. I agree wholeheartedly that in order to address South Africa’s problems meaningfully, we need perennial economic growth writes Azola Zuma.

South Africa did experience strong growth during the commodities boom of the 2000s. In fact, from 2002 to 2008, South Africa grew at an average of 4.5% year-on-year, its fastest expansion since the advent of our democracy. Since the recession in 2008, our economic growth has been sluggish and below the African average. At this particular point in 2017, we find ourselves in a technical recession where we have experienced two successive quarters of economic contraction – economic growth in reverse mode. Q4 of 2016 closed off with our economy having shrunk 0.3%; in Q1 of 2017 our economy shrank again by 0.7%. This is of huge concern given the myriad of problems we are yet to address as a country. In the absence of economic growth we cannot tackle unemployment, nor can we tackle elimination of poverty [slow economic growth means less income tax revenue the Government can collect to fund the grants that we pay to the destitute] and inequality is here to stay if there is no new capacity being created in the economy. Investment is what is required to get South Africa out of its current weak economic conditions.

There are two types of investment that are available to an economy; foreign direct investment (“FDI”) and domestic investment. FDI will be reluctant to deploy capital into the South African economy following the sovereign credit rating downgrades we had to contend with in the second quarter of the year. Furthermore the recently released Mineral Petroleum Resources Development Amendment Bill has spooked investors in our resources sector. Domestic investment in the form of long-term retirement savings and life insurance assets is investment capital that belongs to ordinary South Africans. These ordinary South Africans live in South Africa and have nowhere else to go should things go belly up in this country. This long-term capital sits invested for very long periods of time given our normal retirement ages of 60 years plus, and the fact that our life expectancy has increased from 55.2 to 62.4 years, so even life insurance monies stay invested for longer. These monies sit invested for periods of 40 years plus. It therefore stands to reason that this capital base needs to be leveraged to facilitate investment into our economy. For retirement funds, Regulation 28 which sets the prudential limits per asset class that retirement monies can be deployed into, already makes provision for investing into areas that can propel our economy into positive territory, namely alternatives. It makes provision for investment into unlisted investments including private equity – these are unlisted companies that fall into the small to medium enterprise range that we know are important for economic growth – infrastructure and other alternatives such as hedge funds are also provided for. Regulation 28 stipulates that up to 15% of retirement fund monies can be invested into a combination of private equity and hedge funds. Now if you consider that retirement funds comprise roughly R4.5 trillion of the total savings pool in South Africa, this means up to R675 billion can be deployed into these alternative asset classes. Most retirement funds are not even at the 5% mark in terms of deployment of this capital.

We know that South Africa has infrastructure backlogs; we had to contend with load-shedding not so long ago, we’ve had water restrictions all over the country in 2016 and 2017, and dam water levels are yet to recover to acceptable levels in parts of the country. We have an inadequate healthcare system with a shortage of beds, the quality of our public education has regressed with teachers being absent more than they are present to teach. There is no doubt in my mind that we need this long-term domestic capital to be invested in long-term economic infrastructure projects such as energy, water, healthcare and education in order to get the economy back on track. Long-term domestic capital also needs to be invested into social infrastructure such as affordable housing and student accommodation.

The deployment of this capital rests with the decision-makers in retirement funds (Trustees), together with their expert advisers (Asset Consultants). There is no better time than today, where investors the world over are in search for yield, to deploy this capital into alternatives. We operate in a low-return environment, so the bulk of the assets that continue to be invested in traditional listed asset classes are going to scramble to deliver good returns. Institutional investors such as retirement funds ought to be deploying their long-term patient capital into alternative asset classes as outlined above. Not only does this diversify the return opportunity set for the retirement funds, but it helps to propel the South African economy into a healthy mode that creates employment and drives demand.

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