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Are African leaders serious about using savings versus debt to better our African economies?

07.11.2017Nthabiseng Moleko, Economics & Statistics Lecturer, Stellenbosch Business School

According to the Nigerian, South African and Kenyan pension regulators we have seen significant growth of pension assets in the last decade. Kenyan assets have increased from 105 billion (Kshs) shillings in 2002 to 700 billion in 2013, the year on year growth remains buoyant with 0.8 percent growth to Kshs 807 billion (2015). The Nigerian economy has seen a similar rise from $7 billion (2008) to $19 billion in 2016, and South Africa's meteoric growth to $207 billion (2016) from $160 billion during the same period. South Africa's Financial Services Board (FSB), Kenyan Retirement Benefits Authority (RBA) and Nigeria's Pension Commission (PC) have established a strong regulatory framework, and asset consultants and managers continue to manage fast growing pension assets in relation to GDP. The Kenyan and Nigerian growth is similar to economies such as Mexico, Spain, France, Italy, China, Brazil and India who have asset to GDP ratios lower than 20%. In the last decade Towers Watson Global Pension Study has identified South Africa as the 11th biggest pension market globally and it has grown considerably over the last decade by 15% to significantly high level of assets at 74% in relation to GDP. The question is - - how is Africa using these funds more strategically to tackle inequality, underdevelopment and joblessness?

             
Source: Authors compilations from World Development Indicators (online), Financial Services Board Annual Reports, 1960-2013

                      
                           Source: Retirements Benefits Authority, 2017

                     
Source: Authors own work (Towers Watson, 2016 and OECD Pension Fund Indicators, 2016)

The increased size of pension assets has fared well for capital market development, showing both increased depth and liquidity of securities markets. The modernisation of infrastructure increased assets for bond and equities, particularly in the long run. Improved regulatory framework is also a consequence of pension asset growth with even some empirical studies attributing it to lowering of transaction costs. When the South African and Kenyan investment allocation by asset class are compared we see signs of large exposure to domestic equities (17.6% and 23%) and bonds (8.5% and 36%), including government securities. It is only in Eastern Africa a sizeable allocation in immovable property at 19% versus South Africa's lower 1.2%. Kenya has allocated an impressive Kshs 150 billion as at December 2015. Alternative investments, which include investments in infrastructure, are an asset class that require significant development for increased allocation in our capital markets. The African Equity Fund and Isibaya Fund, managed by the continent's largest pension fund manager (Public Investment Corporation), allocate a total 2% of the total assets of R37.1 billion into such investment products. Particular emphasis on the development of instrument, bonds and equities (listed and unlisted), project planning and packaging of such facilities is a key requirement in furthering such. The worsening condition of our West, East and Southern African economies must make use of all possible means to transform it, such as using capital markets in particular as an enabler to propelling economic development in greater proportions.

This is all against a backdrop of a slowed economy in the continent's two largest economies, both facing recession with Nigeria -1.5% growth and SA's lacklustre 0.29% growth in 2016. In the same period Kenya has experienced 5.8% growth, however, has the highest jobs crisis amongst the countries. The governments need to make deliberate efforts to put all these economies on higher growth paths. For instance, South Africa's growth has averaged 3% post democracy and at its peak, growth hasn't exceeded 5.6%. Kenya's growth and Nigerian economic growth has grown but neither of these economies have grown sufficiently to absorb unemployed labour, decrease widening inequalities and reduce significant poverty and infrastructure backlogs needed to boost sectorial development. The number of unemployed continue to worsen with the hardest hit being women and youth, ranging from 14.2% an estimated of 28 million people. South Africa's 26.6% with Kenya's staggering 39.1% unemployment levels signal a serious structural crisis. Despite significant growth, all these economies have been unable to match increased growth by absorbing new entrants into the labour market.

The total infrastructure backlog estimations made by the African Development Bank were projected at $93 billion per annum. With investment in productive investment and absorbing local labour we can begin to make a positive dent in poverty and unemployment. Public investment is inadequate to meet the financing requirements estimated at 10% of our economic output per annum. Labour intensive growth is what is required for our economies. However, we cannot be further indebted to Bretton Woods institutions in the process. Already soaring debt to GDP ratio's and heavily priced servicing costs places high levels of opportunity costs on the option of borrowing and servicing debt. The question is, where will the finance required to promote productive growth be drawn from? Increased investment must be in capital formation, making investment in machinery, equipment, and industrial infrastructure, logistics support through the construction of railways, ports, roads, and investment in other such infrastructure that will unlock the economy in regions that could be developed as economic hubs.

Is it true that investment in infrastructure is a risky investment?

The sole purpose of pension regulators is to ensure that there is a conducive environment to investments but limiting risky and reckless investments of pensioners. Curtailing the ability to act as a watchdog from looting and enforcing limitations on asset classes for optimal returns is crucial. This is to protect the pensioners' interest. However, is has been shown in countries such as Canada, the USA and Australia that have invested up to 15% of total public pension assets in infrastructure investments. These investments using non-traditional financing mechanisms have shown significant returns in other countries, whilst developing the economy has yielded positive returns. In a global pension assets study by Harith & Preqin, more than three quarters of infrastructure portfolio performance of infrastructure assets has met expectations. It exceeds 90% when including portfolios that have exceeded performance. The argument that targeted investment do not hold returns equivalent to other asset classes is unjustified as they do not perform differently from non-targeted investments.

The fears of weak state capacity, poor planning and weak governance of institutions and political meddling are seen as hindrances to securing not only foreign but even curtailing attempts to increase domestic savings as investment for domestic infrastructure. It must be stated though that infrastructure projects such as toll roads, power distribution and transmission facilities are able to generate operating cash flows. In order to ensure changes in investment behaviour and patterns, contract law and methods for recourse coupled with a strong regulatory capacity in infrastructure are required. The regulatory capacity in East African economies (including Kenya) and South Africa do not restrict investment, however in other countries pension fund regulation must reduce fragmentation and not be a constraint in diversifying assets. Secondly, governance concerns over agencies and their ability to collect payments for infrastructure services can only be quelled by building strong institutions and developing a track record of success. It has to be the state that quells the notion that there lack investable products, thus restricting investments. We have seen in South Africa how investment in institutional capacity from as far back as 1959 with the FSB's establishment has led to the development of a strong regulator, and one of the biggest pension market globally. It shows the state has to deliberately channel resources into development of project planning, project packaging and in the development of investable products using its institutions.

The task of improving the marginal productivity of capital requires innovation in our capital markets. Pension funds are a long term supply of funds to capital markets and offer the opportunity of diversifying risk and also heeding against investment risk as an asset class.

Economic estimations show that the size of the informal economy ranges from 10-50% of our African economies with a sizeable portion of our economy not contributing to formal pension schemes. Economic growth that is underpinned by increased labour productivity and employment will see the size of pension funds surely increase. But the strength of the relationship between pension funds and growth is strengthened if capital markets are developed with the intention of further driving growth.

Capital markets can also offer solutions that respond to the constraints of jobless growth, particularly in our emerging markets or developing economies. Life insurance companies, pension fund managers and the wider financial services sector should be encouraged to play a greater role in the provision of capital to drive continental growth. In time, the increased savings effect from pension funds will trickle in greater proportions through capital markets and grow the entire economy.

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About The Author

Nthabiseng Moleko is a Faculty member at the University of Stellenbosch Business School and teaches Economics and Statistics to postgraduate and Masters students. As a former Chief Executive Officer at JoGEDA, Project Manager and Researcher at ECSECC she has worked extensively in the economic development landscape.  At ECSECC she contributed to the development of various policies that contributed to the policy aspects of economic development in South Africa working with regulators, policy makers, national and regional government. The transition from a policy research think tank at ECSECC to a development agency in JoGEDA enabled her to be involved in several regional projects in South Africa. She started her career in the credit team at a highly rated specialist institutional fixed income boutique asset management firm, Futuregrowth Asset Management. Nthabiseng obtained her Bachelor of Business Science (Honours) degree in Economics at the University of Cape Town. Thereafter she obtained a Masters in Development Finance from the University of Stellenbosch Business School (USB). She is currently completing her PhD in Development Finance from the USB with the topic centred around pension funds, savings, capital market development, the Public Investment Corporation and growth.   Her research encompasses several time series analysis using econometrics to understand financial services, namely pension funds and capital markets contribution to economic growth.  She seeks to understand how financial development in Africa can be better used to aid economic development.

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