Despite the government’s announcement of a R30-billion sovereign wealth fund, analysts are questioning its utility in a time of increasing debt.
Finance Minister Tito Mboweni has announced that the government will form the South African Sovereign Fund, with starting capital of about R30-billion.
Financing the fund would be difficult because of South Africa’s budget deficit, which is approaching 7% of gross domestic product ; debt levels that are rising rapidly and a tax intake that has dropped, said George Glynos, co-founder and head of research at financial market and analysis firm, ETM Analytics.
According to treasury figures, South Africa’s debt-to-GDP ratio is expected to reach 65.6% in 2020-2021. It is then projected to rise to 74.6% in 2023. In his address, the president said his administration decided to create a sovereign wealth fund, “as a means to preserve and grow the national endowment of our nation, giving practical meaning to the injunction that the people shall share in the country’s wealth”.
According to Investopedia, the primary functions of a sovereign wealth fund is to stabilise the country’s economy through and to generate wealth for future generations. It notes that the motivation to develop such a fund varies from one country to another. “So, if you now say that is no longer part of budget revenue, and it must go into a sovereign wealth fund that means there is going to be a bigger hole in the budget.”
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