South Africa to Establish $2 Billion Sovereign Wealth Fund

(Bloomberg) --

South Africa will use money from the sale of broadband spectrum and mining royalties to establish a 30 billion-rand ($2 billion) sovereign wealth fund, Finance Minister Tito Mboweni said.

“A sovereign wealth fund is an important long-term tool for saving and investment for future generations,” Mboweni told lawmakers Wednesday in his annual budget speech. “It can also contribute to strengthening the fiscal framework.”

The proposed fund comes at a time when South Africa is struggling to contain rising debt amid sluggish economic growth and a budget deficit projected to widen to a near three-decade high of 6.8% in the coming fiscal year. Its establishment was first mooted at least 10 years ago.

The legislative framework for the fund will be submitted to parliament. Funding will come from the government’s plans to sell broadband spectrum this year, along with royalties from petroleum, gas and mineral rights, as well as the sale of non-core assets, future surpluses and savings, Mboweni said.

The timing of the fund is inopportune given South Africa’s large budget deficit and rising debt-to-gross-domestic-product ratio, said Johann Els, chief economist at Old Mutual Investment Group.

“It takes attention from the real problems that we have at the moment,” he said by phone.

The government is also pressing ahead with plans to form a state bank that will operate as a retail financial institution premised on commercial principles, Mboweni said. The Prudential Authority that falls under the Reserve Bank has yet to grant the proposed lender an operating license.

“There are market failures in so far as the poor getting better access to the basic banking services so it’s also an attempt to have financial inclusion,” Deputy Finance Minister David Masondo, who is leading the state-bank project, told reporters in Cape Town on Wednesday.

The government bank will be entering a crowded space, with South Africa’s commercial lenders already contending with the threat of fresh competition from new entrants to the market, such as African Rainbow Capital Investments Ltd.’s TymeBank and Discovery Ltd.’s Discovery Bank.

“If we can’t run state-owned enterprises efficiently I am pretty sure that the private banks are much better capitalized and in a much better position to extend banking services to the whole population,” Els said. “They all have specific, cheap bank accounts they have put out to extend services to the under banked.”

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