A report prepared for it suggests reducing the 45% offshore investment limit ‘in tandem with increased investment’ in public projects within the country.
The National Planning Commission (NPC) has published a report on changes to what it calls South Africa’s financial architecture, which bemoans that “private balance sheets” do not allocate enough funds towards investment in public infrastructure.
It has a ready fix, hinting that a change to Regulation 28 of the Pension Funds Act can effectively channel money to financing local infrastructure by reducing the percentage that retirement funds are allowed to invest offshore.
Professor Mark Swilling of Stellenbosch University and political economist Dr Steffen Murau, authors of the report, say their comprehensive assessment of SA’s monetary architecture – the interconnected web of public, private and hybrid balance sheets that channel credit, allocate capital and govern investment – does not allocate capital effectively to address “deep structural inequalities”.
“South Africa’s post-apartheid growth model has failed to reconfigure the deep structural inequalities embedded in the inherited monetary architecture,” say Swilling and Murau.
“Instead, the current system continues to produce patterns of financial exclusion, underinvestment in fixed capital, and economic extractivism, while rewarding short-term profit-taking over long-term productive investment in gross fixed capital formation (GFCF).
“Since 1994, SA has not benefitted from a system of macro-financial governance of the financial ecosystem,” they argue.
They say their concept of financial architecture challenges the conventional policy division between public and private sector financing, arguing instead for a systemic approach that places macro-financial governance at the centre of structural transformation.
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‘A web of interlocking balance sheets’
“Using this approach, the architecture of the South African financial ecosystem is understood as a web of interlocking balance sheets, in which the assets and liabilities of banks, development finance institutions (DFIs), pension funds, shadow banks, households and state-owned enterprises (SOEs) interact in ways that either support or constrain fixed investment and inclusive growth.
“Monetary policy, public spending and debt, household finance, savings, intermediation and corporate investment behaviour must, therefore, be viewed as interconnected components of a single complex adaptive system,” they say, analysing different points of the last 30-odd years to demonstrate their thinking.
The report maps the SA monetary architecture at 1983, 1996, 2014 and 2024.
Swilling and Murau say their research shows that the monetary architecture has remained “racially structured”, despite the end of formal apartheid.
The report states that:
• In 1983, the apartheid state began liberalising financial markets while expanding SOE debt to finance large-scale infrastructure and defence. This laid the groundwork for financial dualism, where elite households and large firms accessed finance.
• In 1996, with the adoption of the Growth, Employment and Redistribution (GEAR) strategy, macroeconomic policy shifted toward fiscal consolidation and inflation targeting. The liberalisation of capital markets and pension funds led to increased financial deepening and financialisation but did not result in significant new fixed investment in GFCF.
Public investment continued the long-term decline that had started in the late 1980s, and household debt grew without corresponding asset accumulation among poor and working-class households.
• By 2014, the erosion of public sector investment had deepened. A series of banking crises had resulted in the consolidation of a highly concentrated banking sector dominated by a handful of large banks.
SOEs had moved toward commercial models, often relying on expensive corporate borrowing or infrastructure concessions.
By then, state capture had already started hollowing out the capacity of SOEs, while private fixed investment lagged, with listed corporations accumulating cash reserves and expanding abroad.
DFIs remained undercapitalised and fragmented, with limited systemic coordination. “The expanding shadow banking sector became the enabler of accelerating velocities of financial flows within the financial sector rather than into the ‘real economy’,” according to the report.
• By 2024, the post-Covid-19 and Just Transition context created new demands for strategic infrastructure finance, renewable energy investment and inclusive industrialisation. “The monetary architecture, however, remained disjointed.
“While profitability in the banking and non-bank financial sector recovered, GFCF remained well below the target levels set by the National Development Plan (NDP). Public sector balance sheets, including those of municipalities and SOEs, remained highly constrained, while large corporate balance sheets continued to reflect significant offshore asset shifts.
“Despite the expansion of financial inclusion (e.g. basic bank accounts and credit access), low-income households remain structurally excluded from asset accumulation. This perpetuates inequality and undermines economic resilience,” Swilling and Murau say.
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A need for coordinated investment
They believe the failure to coordinate investment across public, private and hybrid balance sheets resulted in blended finance remaining underutilised while investment opportunities available to the private sector go unrealised.
The authors complain of a failure to “discipline” and direct private capital toward domestic investment.
“The corporate sector’s shift to global asset markets and the weak regulatory framework around pension fund investment mandates have created an extractive model of capital allocation that prioritises short-term returns and offshore flows over long-term developmental investments in GFCF within SA.”
The authors refer to an approach that “draws from international examples and proposes a new paradigm of financial governance that sees macroeconomic strategy as the dynamic management of public and private balance sheets across the system”.
“Rather than limiting policy to fiscal ratios or inflation bands, the state should act as a strategic orchestrator of financial flows, identifying, negotiating and unlocking elasticity spaces where capital and credit can be redirected toward inclusive and sustainable investments in GFCF, in general, but in the Just Transition, in particular,” they say.
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Proposals
The proposals to the NPC include that government must act to reconfigure balance sheets to facilitate a Just Transition and boost GFCF in SA to address inequality and underinvestment.
“The primary recommendation is the establishment of a system-wide macro-financial governance mechanism to track, model and coordinate interlocking public and private balance sheets,” they say.
“This would facilitate mission-oriented blended finance that prioritises public value creation rather than filling in financing gaps with private sector investments.”
To this end, they submitted the following specific recommendations for consideration:
“It is recommended that the South African Reserve Bank’s (Sarb) Prudential Authority (PA) take over supervision of DFIs such as the Land and Agricultural Development Bank of SA (LandBank), Industrial Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA).
“The resultant collective balance sheet expansion could reach R1.4 trillion, directly addressing underinvestment in GFCF.
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“Consideration should be given to reforming Regulation 28 [of the Pension Funds Act] to reduce the 45% investment limit in tandem with increased investment in GFCF within SA.
“As infrastructures are unlisted assets, the constraints on investments in unlisted assets imposed by Regulation 28 may need to be relaxed,” they add.
“A key reform might be to require pension funds to draft ‘annual infrastructure investment plans’ and to include reporting against these plans in their quarterly reports to the regulator. Redirecting 20% of pension fund assets could unlock a R1 trillion project pipeline, especially if supported with sovereign guarantees and stock exchange-listed instruments,” according to the report.
Swilling and Murau also propose that the Government Employees Pension Fund (GEPF) realign its mandate with NDP targets to increase investment in SOEs, BEE contractors and domestic productive companies to 30% of its funds.
“Rebalancing away from dual-listed, offshore-oriented firms should be encouraged,” they say, noting that all their proposals could unlock at least R5 trillion in new investment in GFCF and the Just Transition.
“This could result in reduced inequality, an accelerated Just Transition, and foster inclusive economic growth without requiring fundamental changes to monetary or fiscal policy.”
This article was republished from Moneyweb. Read the original here.
