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The Development Bank of Southern Africa (DBSA) has started a process that might lead to South Africa having its first sovereign wealth fund. The proposed fund has been on the cards for several years as Africa’s largest economy looks to join the $13-trillion (about R208-trillion) sector.The DBSA has embarked on a feasibility study that will aid the development of the mooted fund, along with a Pan-African wealth fund that was proposed during South Africa’s G20 presidency last year.The proposed funds seek to advance long-term developmental financing solutions capable of addressing persistent infrastructure deficits, climate financing pressures, economic vulnerabilities, industrialisation constraints, fiscal pressures and structural inequality confronting South Africa and the African continent. “Despite South Africa’s sophisticated financial system, strategic mineral endowment, the depth of its pension industry and institutional capabilities, the country does not currently have a fully operational sovereign wealth fund,” the DBSA says in its call for proposals.“At the same time, South Africa faces significant infrastructure financing gaps, elevated public debt levels, structural unemployment, constraints on state-owned enterprises, fiscal pressures, energy transition requirements, climate financing obligations and rising developmental demands.“The concept of a South African sovereign wealth fund therefore presents an opportunity to mobilise strategic long-term capital in support of infrastructure development, economic diversification, industrialisation, energy transition, climate resilience, fiscal sustainability and intergenerational equity.”The ANC and President Cyril Ramaphosa first proposed creating a national sovereign wealth fund in August 2018 to grow and protect South Africa’s mineral wealth for future development.However, Ramaphosa said two years ago that countries with sovereign wealth funds broadly maintain surpluses in their current accounts and budget balances and that the South African fiscus at the time was not a position to fund one.The concept of a South African sovereign wealth fund therefore presents an opportunity to mobilise strategic long-term capital in support of infrastructure development, economic diversification, industrialisation, energy transition, climate resilience, fiscal sustainability and intergenerational equity.— DBSA “At present, South Africa’s fiscal position — with substantial current account and budget deficits — is not favourable for the establishment of a sovereign wealth fund,” he said at the time.“Funding for service delivery remains under pressure. Additional resources are required to improve the recruitment of key personnel such as police and teachers. We also need to increase investment in the maintenance of basic service infrastructure.“In light of these realities, the most appropriate policy path is to use any additional resources at this moment to reduce the debt burden and improve the delivery of services.”South Africa’s fiscus has since turned the corner, having recorded three consecutive primary budget surpluses in the year through March.However, the service delivery constraints the president raised in 2024 are still persistent. One of the possible routes towards the establishment of a sovereign wealth fund is through the reform and consolidation of the country’s state-owned enterprises. Several countries use revenue from the exploitation of natural resources to establish and sustain sovereign wealth funds.Norway’s Government Pension Fund Global is said to be the world’s largest sovereign wealth fund, managing over $2.3-trillion in assets.Other countries that have sizeable wealth funds include China, Saudi Arabia, the United Arab Emirates, Singapore, Kuwait, Qatar and Sweden.The DBSA said preliminary research “identified significant opportunities associated with South Africa’s strategic mineral resources, pension and institutional capital markets, public asset portfolios, infrastructure investment requirements [and] climate finance mobilisation”.“In addition, the research recognised that the successful establishment of sovereign and regional wealth funds requires robust governance systems, legal frameworks, transparency mechanisms, fiduciary safeguards, political will, financial sustainability frameworks, institutional capacity, stakeholder coordination and long-term developmental policy alignment.”South Africa holds dominant positions in some of the world’s most sought-after minerals, such as platinum group metals, chrome and manganese.The country’s pension and capital markets are also the deepest on the continent, with total retirement savings and the pension market valued at approximately R5.6-trillion to R5.8-trillion, making it the largest pension market in Africa and the 16th-largest globally.The DBSA is looking to rope in experts with multidisciplinary acumen in sovereign wealth funds, development finance, financial modelling and political economy analysis, among other expertise.“Traditional financing mechanisms such as sovereign borrowing, fiscal revenues, donor financing and development finance institution funding remain insufficient to meet the scale of developmental and infrastructure requirements across the continent,” the DBSA said.“At the same time, global sovereign wealth funds collectively manage more than $13-trillion in assets and have increasingly emerged as strategic instruments for long-term developmental investment, macroeconomic stabilisation, strategic industrial financing, national wealth preservation, infrastructure investment, climate financing, economic diversification and counter-cyclical fiscal support.Sustainable economic development“These funds have played an increasingly important role in supporting sustainable economic development, strengthening fiscal resilience and mobilising long-term capital for strategic national and regional priorities.”About 30 African countries have sovereign wealth funds in various forms and structures, with countries increasingly utilising these funds as mechanisms for resource mobilisation, infrastructure financing, fiscal resilience and strategic investment.African states have been criticised for not seizing the opportunities presented by the continent’s vast mineral deposits. Despite controlling 30% of the world’s known critical mineral reserves, the companies that process these minerals are largely foreign. Business Times
