Capital will flee if its hand is forced

20 January 2019 - 00:02 By CHRIS BARRON

The introduction of prescribed assets by the government would trigger a massive flight of foreign portfolio investments, says Leon Campher, CEO of the Association for Savings and Investment SA (Asisa).
In its election manifesto, the ANC undertakes to "investigate the introduction of prescribed assets on financial institutions' funds".
Campher says "prescribed assets" is understood to refer to the government forcing the savings industry to buy government stock as well as bonds issued by state-owned enterprises (SOEs).
This would have devastating consequences, he says.
He points out that the JSE is about 39% owned by foreign pension funds, equating to about R2.9-trillion. In addition, there's about $90bn (R1.2-trillion) in South African bond markets.
"Foreigners like our domicile because we're probably the most sophisticated emerging-market domicile. We work effectively. If you trade, you get settled, and so on," says Campher.
But no matter how well it works for them, their mandates allow them to invest only in domiciles that are investment grade, or not junk status, and where there is no interference in the markets.
"Prescribed assets would be an interference in the markets."
Their introduction would trigger mandatory consequences - "that's just how things are".
"What you want to avoid is a flight of portfolio investments, which could be hugely detrimental to the currency. And linked to that, if your portfolio investments are cool and your domicile's cool, it facilitates fixed investment in factories and so on."
He says Asisa, which represents the big pension and life funds in SA, will on no account back prescribed assets.
"It did not work when introduced by the apartheid government and would have equally devastating effects for the country should it be introduced now."
Instead of bringing relief to stricken SOEs, with Eskom clearly at the top of the list, it would add to their already unsustainable debt burdens, he says.
"The only way you can invest in Eskom currently is to buy bonds." Eskom would have to pay interest on these loans.
Even if, as it was under apartheid, interest is set at below the commercial rate, "it won't solve the problem of their interest rate burden", says Campher.
He was a fund manager under the apartheid government and experienced at first hand the consequences of what the ANC seems to be dangling in front of the electorate as a magical solution to the country's problems.
"If you have prescribed assets it creates additional debt and adds to the interest-rate burden whether of government or SOEs."
In all, 55% of the book value of pension fund assets had to go into what were designated "prescribed assets" - government bonds and bonds for SOEs.
It distorted the capital market and prevented the development of a proper secondary market.
"You need a proper, functioning capital market so that if the primary issuers come out, the savings industry takes up the paper. If the market operates efficiently then when that fund manager needs to sell it, there's a [secondary] market where it can be sold and bought.
"In those days there was no secondary market."
The pressure for prescribed assets is partly due to the belief that the private savings industry is sitting on a mountain of cash it refuses to invest in the country's development.
Campher says this is rubbish.
"Our exposure in mid-2018 was between R1.3-trillion and R1.4-trillion invested in government bonds, SOEs and the big local authorities," he says.
That's 25% of the money held by pension funds, life offices and mutual funds.
"Our mantra - we made the point very clearly at the jobs summit and investment summit - is that we want public-private partnerships where we develop infrastructure jointly at project level, like we did with the renewables."
There's "billions and billions" available for infrastructure development, and the savings sector "has always been very willing" to invest this money into properly conceived, planned and managed projects.
This is why R200bn from the private savings sector has gone into the renewables industry, he says. But elsewhere, suitable projects are thin on the ground.
"We desperately want to shop, but currently the shelf is bare."
Those wanting prescribed assets say the alternative is allowing Eskom to sink.
"Everybody understands it will be a disaster if Eskom falls over," says Campher. "But to help Eskom you don't need to introduce prescribed assets."
He notes that when the ANC talks in its manifesto about investigating prescribed assets for SOEs, it talks about social projects.
"That means projects that do not have an economic return.
"But if the savings sector and government work in partnership to deliver infrastructure for the needs of the country, then the government's balance sheet gets freed up and they can quite easily, off the taxpayer base, deploy money into social projects."
There's also the question of how effectively pension and insurance fund money forced into SOE and government coffers will be deployed, he says.
The record suggests this would be "a problem" for the investment managers who sit between the pension funds and SOEs.
They have a fiduciary responsibility to ensure that the interest of their client is protected when they deploy the money. Their licence depends on it.
Under the apartheid regime, the fact that pension funds were compelled to buy government and SOE bonds gave them no influence over governance at all.
They were entirely at the mercy of the entities into which they were pouring their clients' money.
Campher says he has no reason to suppose it would be any different now.
Clearly, fund managers have more control over how their money is deployed if they can choose whether to invest it or not.
"The fund management industry made it very clear a year or so ago they were not going to support bond issues from certain SOEs until they got their governance right."
The ANC's response in its manifesto is: "Oh yes you will."

This article is reserved for Sunday Times subscribers.

A subscription gives you full digital access to all Sunday Times content.

Already subscribed? Simply sign in below.

Registered on the BusinessLIVE, Business Day, Financial Mail or Rand Daily Mail websites? Sign in with the same details.

Questions or problems? Email or call 0860 52 52 00.