Revisiting the case for a South African Sovereign Wealth Fund

There is one encouraging trend that seems to be taking on greater prominence in the world economy, namely the rising number of countries that are creating their very own sovereign wealth funds (SWFs). One of the recent cases is Ireland, an economy that has been successful in attracting MNCs and deriving the corresponding fiscal benefits. The latter are to be directed into the Future Ireland Fund that is expected to reach 100 bn euros by 2035 and is to finance future pension, healthcare and climate costs[1]. In the UK at the end of 2023 proposals were advanced “that the UK establishes a sovereign wealth fund once the UK government reaches a budget surplus. Contributions to the fund would come from an element of income tax, and over the long term it would fund liabilities in the UK’s pensions and benefits system”[2]. The idea of an own SWF has also been actively discussed within the EU in the course of 2023. It seems that for once the developed economies are playing catch-up to the developing world that has dominated the SWF scene in the past several decades. But despite all the advances of the Global South in promoting the creation of SWFs, there remain important gaps in the SWF map of the developing world, most notably with respect to South Africa.

It has been noted long before that of all of the BRICS5 economies South Africa was the only member without a sovereign wealth fund[3]. After the expansion of 2024, it turns out that even in an expanded BRICS10 setting, South Africa is still the only member of the bloc without such an SWF. Iran created its Sovereign Development Fund of Iran in 2011. Of the new BRICS+ members all African members, namely Egypt and Ethiopia, have their very own SWFs. The Sovereign Fund of Egypt was established in 2018 (with amendments adopted in 2020), while in Ethiopia the Ethiopian Investment Holdings (EIH) was created in December 2021. Importantly, the Egyptian SWF is cooperating closely with its BRICS+ peers from Saudi Arabia (PIF) and the UAE (ADQ) to advance private sector development.   

The process of launching new SWFs in Africa continued in 2023, including in the broader South African region. In December 2023 lawmakers in Mozambique approved the creation of the country sovereign wealth fund on the back of expected increases in proceeds from LNG exports[4]. Earlier in 2022 Namibia, another neighbor of South Africa, created its own SWF. All other major neighbors of South Africa in the region, namely Botswana (Pula Fund) and Zimbabwe, also have their SWF platforms. Overall, Africa has nearly 20 sovereign wealth funds[5], something that is leading to the creation of a platform for African SWFs. This platform has been formed “between IE University, the UN Joint SDG Fund (a UN flagship global fund that is supercharging the United Nations Development System around the world), and the International Forum of Sovereign Wealth Funds [that] launched an Initiative to connect SWFs with SDG Impact Investing”[6]. While thus far the Initiative focusses on the African SWFs, it is expected to be broadened to other regions of the world economy in the future.

The creation of a South African SWF as well as the formation of a platform for SWFs whether among the BRICS+ or within the broader G20 ambit has been one of my long-standing calls since 2018-2020[7]. In order for the BRICS+ platform for SWFs to be complete, South Africa needs to finally catch up with the progress on this front attained by its neighbors as well as the broader developing world. Of greater importance than the completion of the BRICS+ SWF puzzle is of course the need for South Africa to improve the quality of its economic policies. While the effects of such sovereign wealth funds vary across countries depending on their design and operational modalities, international best practice amply shows that SWFs can perform the role of anchors of macroeconomic stability and fiscal policy rules.

At this juncture, South Africa is experiencing difficulties with launching such a SWF in view of the scarcity of fiscal reserves and mounting fiscal pressures on the expenditure side. According to Fitch, “the government’s medium-term budget policy statement (MTBPS) raised the projected fiscal deficit for FY24 to 4.9% of GDP, from 4% in the 2023 Budget”, while government debt is projected over the medium term to reach nearly 78% of GDP[8]. Despite such constraints, proposals have been put forward regarding the possible sources of capitalizing a South African  SWF – one such proposal was advanced by the Alternative Information Development Center to use the resources of the Government Employee Pension Fund to capitalize such a SWF for South Africa[9]. If domestic sources prove to be limited then the question is: could the expanded BRICS+ provide assistance to South Africa in launching such a fund that would deliver the longer term benefits of improving the quality of the country’s economic policy?     

Among the possibilities could be assistance from the BRICS CRA that could provide support to South Africa in the amount of up to USD 10 bn, with the potential instruments so far being limited to the precautionary and liquidity facilities. These two instruments are similar to the IMF’s Precautionary and Liquidity Line (PLL), with the IMF’s array of facilities being far more diverse compared to the BRICS CRA[10]. There could be a need to expand the available instruments of BRICS CRA to include facilities similar to the IMF’s Flexible Credit Line via introducing amendments into the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement. The accession of countries such as Ethiopia as well as Egypt further increases the need to explore the modalities of expanding the tool-kit of instruments available for the BRICS grouping to support its members.

In the end, a sovereign wealth fund for South Africa would benefit the quality of the country’s macroeconomic policies, particularly if it is predicated on the operation of fiscal rules that serve to limit the growth in public debt/fiscal deficits. The creation of such a fund would also enable South Africa to participate in the platforms and initiatives that bring together SWFs in Africa as well as within the BRICS/BRICS+ or UN/SDG frameworks. Support from a reinvigorated BRICS CRA could provide additional fiscal space for South Africa in launching its SWF. Waiting for favourable changes in terms of trade to launch such a SWF may result in precious time being lost – the creation of the fund (even if limited in size) may advance not only greater fiscal discipline, but could also improve investor sentiment and the credibility of the authorities’ macroeconomic policy framework.

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