South Africa is getting a new state-owned bank – but there are glaring problems

President Cyril Ramaphosa has announced that government is moving ahead with its plans to launch a state-owned bank and a sovereign wealth fund.

“We have decided to establish 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,” the president said in his State of the Nation Address (Sona) on Thursday (13 February).

“We are also proceeding with the establishment of a state bank as part of our effort to extend access to financial services to all South Africans.”

According to Nicky Weimar, an economist at Nedbank, South Africa has a deep, financially sound and sophisticated banking sector, with several banks specialising in providing affordable banking services to the lower end of the market.

“If government is going to fund such a bank partly through retail deposits, its lending standards will have to be sufficient to protect depositors’ money,” she said.

“If not, or it is aimed at developmental finance, the state already has its own financial institutions designed for this purpose, including the Development Bank of Southern Africa, the Industrial Development Corporation, the Land Bank and the Post Office.”

Finance minister Tito Mboweni is expected to give more details on the plans in his Budget Speech later this month.

The position to forge ahead with the establishment of a state bank comes counter to warnings from National Treasury itself that such an institution could be a massive liability that the country can ill-afford.

In a presentation to the Standing Committee of Finance in February 2019, Treasury warned that a number of recent banking failures – including the failure of VBS Mutual Bank – showed that a banking licence should not be handed out lightly.

It also warned of previous issues with state-owned banks, highlighting that the South African Post Office used depositors’ funds to finance postal operational losses in the late 1990s.

Sovereign wealth funds

Weimar said that sovereign wealth funds (SWFs) are normally established in countries with substantial accumulated wealth obtained through rapid growth in the oil and other mining industries.

By contrast, South Africa has a shrinking mining industry, characterised by limited profitability, elevated cost structures, little expansionary investment and increased active disinvestment, she said.

“South Africa also runs deficits on its fiscal balance and current account of the balance of payments. It is therefore unclear where the funds are going to originate.

“The further problem is that SWFs normally invest funds abroad because there are limited possibilities locally. In South Africa’s case any surplus funds should go towards addressing developmental needs domestically,” she said.

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