Prescribed assets would have ‘very real negative impact’ on economy – Helen Suzman Foundation

The Helen Suzman Foundation has said that the introduction of prescribed assets would have a “very real negative impact” on SA’s financial institutions and the economy as a whole.

The foundation released a briefing paper on Tuesday on potential impacts of prescribed assets.  

The ANC, in its 2019 Election Manifesto, stated that the party would “investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development”.

This followed on from a resolution at the party’s 2017 national conference, where the ANC resolved that government should investigate a “new prescribed asset requirement” to “ensure that a portion of all financial institutions funds be invested in public infrastructure, skills development and job-creation”.

Prescribed assets refer to the practice of requiring funds to invest a certain percentage of their assets in government-approved instruments. 

In its briefing paper, the Helen Suzman Foundation said that introducing prescribed assets would have a “negative impact on the stock-market and the country’s overall financial stability”.

“Making investment funds instruments of government policy would be counter to the fiduciary duty of fund managers to act in the best interests of its members [….] as it will result in lower than market returns for the beneficiaries,” wrote policy researcher Charles Collocott.

Collocott added that prescribed assets would also likely lead to decreased foreign investment in South African government bonds and SOE debt, reduce incentives to save for retirement, and an erosion of investment value.

Lower returns

He said that a “large-scale forced asset allocation” would limit the abilities of fund manager to allocate assets in reaction to market conditions.

“Not only will this cause lower than market returns, it may also cause negative real returns, which […] is what happened during apartheid’s prescribed assets policy era”.

South African financial institutions have been adamant in arguing against the introduction of prescribed assets since the ANC election manifesto, saying it will them force to bail out debt-laden government entities. 

“[…] The main objection to prescribed assets is that assets usually are prescribed because there isn’t sufficient demand for them based on their investment merits. In other words, if the assets had sufficient investment merits, there would be no need to prescribe them,” states Andrew Davison, Head of Advice at Old Mutual Corporate Consultants, in a post in March. 

Many South African state-owned entities have significant debt burdens. In his State of the Nation address in June, President Cyril Ramaphosa announced that Parliament will need to urgently table a special appropriations bill to allocate a “significant portion” of the R230bn in fiscal support that Eskom requires. 

The struggling power utility has a debt burden of about R440bn and does not make a profit from selling electricity at current prices. 

He did not mention prescribed assets during his address.