Liberate the GEPF from the JSE
Amandla Correspondent | Amandla 69 |March/April 2020
Globally, stock markets are reported to have lost more than $13 trillion dollars over this past month. South Africa was not spared. On 12th and 13th March the JSE dropped by 10%. That was the biggest single fall since 1997. The JSE All Share Index comprises the largest 164 listed companies. It accounts for almost the entire market capitalisation and liquidity of the market. It has fallen by more than R2.3 trillion since 17th February, and R4 trillion since the beginning of the year. That’s a loss of more than 30% of its value. The savings of poor and working people have been permanently damaged, thanks to the wonders of institutional investors (private pension and provident funds).
Many attribute the economic collapse to the virus itself. But Eric Toussaint convincingly points out why the global economy is built on a petrol-soaked house of cards. And the South African economy is no different. The outbreak of COVID-19 was therefore not the cause, but merely a spark that caused the inevitable fire that’s burning the house down, this time.
It may seem that the cause of the current financial crisis is the decline in labour supply. This is due to the social distancing required to slow the spread of the virus this financial crisis. But it is like the 2008/09 global financial crisis and many of the national crises since the 1990s. It has occurred as a result of increased financialisation of the global economy. An increased emphasis on investing in equity, with quick and easy returns, became the name of the game. This is in fact investment in “financial capital”, a form of capital without any links to the real economy and production. This has given us speculative bubbles. When they burst, they wreak economic havoc.
This is what happened in the 1997 East Asian crisis, the dot com crisis of 2002 and the 2007/8 financial crisis. Capital goes into financial speculation which could have and should have been invested in fixed long-term capital, where it can create real value and consequently many more jobs.
For the past four decades, investing in financial capital has been very profitable for corporations; more profitable than investing in productive or real capital. This has incentivised greater and greater levels of investment in financial capital, globally and in South Africa. Since the 1980s, the total share of the financial economy has grown to four times the size of the world’s GDP. This has resulted in the development of a whole range of exotic financial instruments such as derivatives, asset-backed securities, credit default swaps, etc. And it has given rise to the practice of non financial companies getting more of their profits from financial speculation. This includes many corporations actively buying back their own shares, increasing the value of the shares, instead of using surpluses to invest in productive capacity. Sometimes corporations even borrow in order to purchase their own company’s shares. This results in the over-valuing of stock markets (and rising corporate debt). They continue to grow, despite declining productive capacity, increasing unemployment and inequality.
The South African stock market is similarly overvalued. The Buffet indicator compares the entire value of all the shares in the stock market with the country’s total production of goods and services (GDP). The higher the percentage, the more over-valued the stock market is. According to the Indicator, a stock market that’s valued at more than 115% of GDP is overvalued. In December 2019, the Johannesburg Stock Exchange was valued at 343% of GDP. That made it one of the most overvalued stock markets in the world. In spite of the JSE’s recent collapse, the Buffett indicator remains extremely high, at over 200% of GDP.
The JSE and the Government Employees Pension Fund
The Public Investment Corporation is the asset manager owned by the South African state. It is one of the biggest contributors to the massive overvaluation of the JSE. More than half of the R2,100 billion of assets under the PIC’s management is invested in the JSE. The majority, almost 95% of these assets, belong to the Government Employees Pension Fund (R1,813 bn) and the Unemployment Insurance Fund (R160bn).
The high concentration of investment in the JSE is not only too risky. It also has very little benefit for the 460 000 pensioners and the 1,265,000 workers currently contributing to the GEPF. The fall in the JSE has resulted in the GEPF losing over R200 billion. An alternative would be for the PIC to redirect that investment to much-needed productive capital, aimed at improving people’s lives.
If that had been the case now, the PIC would have lost much less than R200 billion as a result of the massive decline of the JSE. The GEPF pensioners, public sector workers and the more than 10 million unemployed South Africans enjoy minimal benefits from this investment strategy. But they will be the ones who suffer the costs as the bubble bursts.
Besides the massive losses on the stock market, South African investors’ addiction to equity has come at the price of growing unemployment and income inequality. This results from lack of investment in an industrialising job creation strategy, coupled with declining real wages. To make up for income shortfalls, many households have become increasingly indebted: household debt is estimated to be as high as 70% of gross income.
The losses of the JSE cannot be reversed. However, to mitigate these investment risks, the GEPF and the UIF should demand that the PIC reviews its investment policy. It should reduce the level of investment in equity and redirect these investments to government bonds (loans to the government). Furthermore, this crash in the JSE, and the impact it has on the GEPF, underscores the importance of shifting the pension fund back from a “fully funded” to a “Pay-as-you-go: scheme.
“Fully funded” schemes contain enough funds to pay out pensions to all members at the same time, whatever their age. “Pay-as-you-go” schemes only keep enough money to pay out the pensions that are due to be paid. So, conversion would mean that significant amounts of accumulated reserves could be liberated for a pro-poor fiscal stimulus. This should firstly seek to ensure that there are sufficient resources to effectively deal with the pandemic. Secondly, once there is stability, it should introduce greater measures aimed at kickstarting the economy. This would also dramatically reduce the level of risk associated with the PIC’s investment.
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