Nationalisation of the SARB

15 April 2019 Grace Debeila, Portfolio Manager and Analyst at Prescient Investment Management
Grace Debeila, Portfolio Manager & Analyst at Prescient Investment Management

Grace Debeila, Portfolio Manager & Analyst at Prescient Investment Management

Grace Debeila, Portfolio Manager and Analyst at Prescient Investment Management, takes an objective look at the debate about who should own our central bank, and the effect of ownership on its mandate.

In 1921 when the South African Reserve Bank (SARB) was founded, it was set up with a private ownership structure to improve the chances of the bank’s policies being supported and accepted by the broader public. Today, only a small number of central banks globally have private shareholders. Nationalisation of the SARB would thus align the bank’s ownership structure with the majority of central banks across the world.

Overseas experience with nationalisation
A 2017 paper by Jannie Roussouw and Adele Breytenbach of the University of South Africa reviewed available literature on private shareholding and historical instances of central banks that were nationalised.

Before 1935, only a small number of central banks were entirely state-owned institutions. Ownership structures began to change from 1935 when the Reserve Bank of New Zealand was nationalised as the government accepted greater responsibility for the economy. The Danish Central Bank was nationalised in 1936 to give government and parliament greater insight into the affairs of the bank.

The Bank of England was nationalised in 1946. The central banks of Pakistan, Chile, Ecuador, Portugal, Mexico and Venezuela were all nationalised around 1974. Almost all central banks established after WWII - for example, the Central Bank of Australia, established in 1960 - had no shareholders .

The Austrian National Bank was nationalised in 2010 by transferring all shares held by the Republic of Austria to the Reserve Bank. This was purportedly done to improve supervision of the institution. The event drew very little public attention despite the fact that it was the first nationalisation of a central bank since 1974.

The historical frequency of central bank nationalisation globally suggests that it is a “normal” occurrence.

Process for unwinding private ownership
The South African Reserve Bank Act stipulates the private shareholding structure of the bank. Nationalisation could occur as soon as legislation is prepared and a bill is passed in parliament to amend the act via a simple majority vote in parliament.

The primary challenge in implementing the nationalisation agenda might be in deciding on the value at which the bank’s shares would be bought out. The existing legislation describes the process to be implemented when liquidating the bank, but is silent on nationalisation. Upon liquidation, shareholders could be reimbursed based on a formula derived from the value at which the shares are traded. SARB shares trade over-the-counter and are currently priced at roughly R6 to R10 each.

Legislation states that shareholders of the SARB cannot hold more than 10 000 Reserve Bank shares each. There was an instance historically where the High Court had to calculate a penalty when dealing with shareholders who had failed to adhere to this prescription. The price was confirmed by KPMG at R1.55 per share. Some media commentators have suggested that this price be used when buying shares back from private shareholders.

The SARB governor has often lamented that nationalisation could turn into a long and expensive legal process because some shareholders would want to profit from the move, at tax-payers’ expense.

In fact, Roussouw and Breytenbach describe what unfolded when the Austrian Central bank was nationalised in 2010. The minority shareholders were paid a hefty premium over nominal value based on factors such as:

(i) The last trade in the shares had been more than a decade before. One institution had bought the bank’s shares from another institution at a price about ten times more than nominal value.
(ii) Shareholders had to be compensated for giving up their authority to appoint members of the governing board of the bank.
(iii) Yields were low (the benchmark government bond yield was 2.5% a year) while the bank paid a dividend of 10% annually on the nominal value of shares. On that valuation basis, the shares would have traded at a premium to face value if traded on the secondary market.

The whole issue is complicated by the fact that parliament could decide on a completely different basis for valuing the shares.

Merits for nationalisation of the SARB
For those who believe that nationalising the SARB would automatically lead to a change in the bank’s mandate towards a more “pro-growth” stance and less focus on inflation, this is not the case. The bank’s mandate to ensure the stability of prices is set in the Constitution and a move to nationalise the SARB would not constitute a change in the SARB’s mandate or affect its independence. Government ownership does not imply government control.

In any event, the changes proposed by those supporting an alteration of policy would not solve the underlying fundamental issues responsible for the lack of growth and employment opportunities in the economy. In fact, any sign that nationalisation would lead to a move away from the SARB’s central function of maintaining price stability would erode the value of the currency.

Getting rid of private shareholders wouldn’t necessarily strengthen governance. Consider the challenges experienced by South Africa’s SOE’s due to poor or corrupt leadership, appointed entirely by cabinet ministers.

Finally, some commentators believe that control of the bank may come with the ability to directly finance small businesses or agriculture. However, South Africa already has a number of banks focused on development, for example, the Development Bank of Southern Africa (DBSA), the Land and Agricultural Development Bank of South Africa (Land Bank) and the Industrial Development Corporation (IDC). It isn’t obvious that the SARB would do a better job.

What should investors look out for if SARB nationalisation occurs?
The SARB’s private shareholders have no say over the policy, day-to-day running or foreign reserves of the bank whatsoever. The only input they have is voting to appoint seven of the bank’s ten non-executive directors.

Investors should start to be concerned if there are signs that the SARB has begun to lose its operational independence. If that happened, the central bank may no longer be able to perform its function to maintain price stability successfully and the currency would surely deteriorate in value. South African bond yields would rise as investors would demand a significantly higher currency risk premium in order to hold them.

However, this scenario would require the sort of Constitutional change that is not on the horizon.

There are numerous instances in the past of other central banks globally being nationalised or indeed having been owned by the state since inception, with no apparent negative impact on their ability to independently and successfully fulfill their mandates.

It seemed to come as a surprise to some members of the ANC that certain aspects of the call to nationalise the SARB were included in the ANC’s 2019 election manifesto. Cyril Ramaphosa has emphasised that the Reserve Bank’s mandate will not be tampered with, while Ace Magashule has taken the opposite position – claiming that ANC policy is to broaden its mandate. This show of disunity in the upper echelons of the ANC leadership structure is worrying given that we are in an election year, and the government has been trying to encourage foreign investment.

We will follow the conversation closely, but are currently not too concerned that this issue poses an imminent threat to the value of South African bonds or the rand.


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