Foreign funding is South Africa’s best option

It’s an open secret that South Africa cannot afford more debt. At the same time it cannot afford to not stimulate the economy, so this means it needs to make a plan to receive a loan that will see it pay less interest.

When President Cyril Ramaphosa on Tuesday evening announced the ground-breaking and historic socio-economic relief measures worth R500 billion to address the Covid-19 crisis, he mentioned that: “To date, the World Bank, the International Monetary Fund [IMF], the Brics New Development Bank [NDB] and the African Development Bank have been approached and are working with National Treasury on various funding transactions.”

Prior to Covid-19 hitting South Africa’s shores, the government had made a commitment to bring down debt, reduce the deficit and cut spending.

South Africa currently pays back 4% of GDP every year towards government debt.

When the president announced the relief measures, with seven main interventions that were much welcomed, it meant that around R130 billion of the R500 billion support package would, however, be reprioritised from the existing budget.

Lower interest rates

Economists.co.za’s chief economist Mike Schüssler says foreign loans will offer South Africa lower interest rates.

“If international financial institutions can help and [lend] us the money, we will get far lower interest rates,” Schüssler says.

According to the IMF’s website, members may apply for emergency assistance. It says there are some requirements for support under the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI), including that the county’s debt is sustainable or on track to be sustainable, that it has urgent balance of payments needs, and that it is pursuing appropriate policies to address the crisis.

It says it also takes into account any debt restructuring operation underway and its prospects for success, which underscores the importance of every stakeholder trying to support countries in distress.

Funds ‘within weeks’

“After a country has formally requested support, staff assess [its] qualification requirements, work with the authorities to prepare a letter of intent, and prepare a staff report for the IMF executive board,” it says. “We have streamlined our internal review processes and expect to be able in many cases to make financing available within weeks after a request for emergency financing.”

Schüssler says he is not certain at this point if SA will be getting special drawing rights (SDR) for the loan it intends to receive from the IMF, but if it is, this would be more favourable for the country.

“An IMF $4.2 facility will be [at an interest rate of] 1%, and for SDRs it will be 0.08%,” he says. “Then for others, like the World Bank and African Development Bank, we will also get loans that are below what we can get on the open market.”

“Also, [US] Federal Reserve swaps are 0.5% – and at fixed exchange rates,” Schüssler adds.

Early in April the Brics NDB said it was ready to lend South Africa $1 billion to tackle the immediate Covid-19 public health crisis – with another $1 billion later this year to help re-stimulate the economy after the downturn, which is expected as a result of the pandemic and the lockdown.

For all these foreign funders – as with the governments in need of the funding – the focus of the first efforts is to help health systems tackle the immediate challenges of Covid-19.

The World Bank says it could provide up to $160 billion in support to client countries over the next 15 months.

One of its first components will be $6 billion for expedited loan guarantees from the Multilateral Investment Guarantee Agency. “This will enable the purchase of urgent medical equipment and provide working capital for companies, including smaller businesses, while also supporting governments’ short-term funding needs,” it says.

The conditions

Schüssler points out that foreign funding often comes with accountability.

“For SDRs the IMF would want some insight and views into budget and spending. But the days of servicing structural adjustment [programmes] seem long gone,” Schüssler says.

He says, for example, that they would probably want to know how the money is spent and how transparent tenders are, but “they will not say cut this and that”.

He says countries that have received such loans generally decide what to do and how to get their budget deficits under control.

“The IMF was mainly focused on the balance of payments, but has moved on to other things [since] the Asian financial and 2008/9 crisis,” Schüssler says.

Pressure on bonds 

Schüssler says the main reason foreign loans would be a better option for SA at present is because the bond market is under pressure. “Our bond market is stressed,” he says, adding that if foreign loans are granted, they will be accessed at a fixed exchange rate and interest rate. Bonds don’t provide that certainty.

A further benefit, says Schüssler, is that there may come a time when local government bonds need to be issued.

“We will also issue local bonds anyway as part of the normal programme,” he points out.

But it may be that SA must issue more bonds, even with the foreign funding help. Therefore it will have to keep potential funders in local markets in its sights. “We should also then tap foreign normal bond markets from time to time,” Schüssler says.

Impact on growth objectives

Investec economist Lara Hodes does not dispute that foreign debt is an option that needs to be explored at these are unprecedented times, but points out that Finance Minister Tito Mboweni has said that the aim is to stabilise public debt.

“Instead, the widening of government debt projections substantially further would increase the likelihood of additional credit rating downgrades, making SA’s growth objectives more difficult to achieve,” she says.

She acknowledges however that: “These extraordinary times require urgent measures, unfortunately.”

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