Social bond could target R100bn to help Covid-19 response
A government-issued social bond, targeting ESG investors, could help the state ease funding pressures
The government should consider issuing a special social bond to help it fill the funding gap for its response to the Covid-19 pandemic and the economic crisis it has created.
The social bond — proposed in a paper by Intellidex’s Stuart Theobald and Peter Attard Montalto, along with the Covid-19 Economists Group — could target as much as R100bn from offshore as well as domestic institutional and retail investors.
The authors said the government should tap into the growing pool of impact investing, or environment, social and governance (ESG) investors, which target investments that have positive socio-economic and environmental outcomes rather than financial returns alone.
This would be a way for the state to ameliorate the funding pressure it faces during the crisis, which has forced it to increase spending even as tax revenues are expected to decline sharply, according to the paper.
The government announced a R500bn stimulus package in April, and though some of it will be funded through budget reprioritisation and multilateral agencies, such as the International Monetary Fund, it comes as Sars expects a tax revenue shortfall of up to R285bn, which has profound implications for the state’s finances.
Estimates from Intellidex, quoted in the paper, suggest the deficit could soar to 15.4% of GDP, assuming economic growth shrinks by 10.6%, leaving a funding requirement of R806.7bn.
A social bond could make “a significant contribution to the government’s funding gap, raised at lower cost while diversifying the government’s investment base to include ESG funds”, according to the authors.
Other work done by the Covid-19 Economists Group has contributed to the state’s recently launched, government-backed loan guarantee scheme. This initiative provides businesses with concessional loans to fund their operations through the crisis.
A social bond would garner market interest, the group said, as both foreign and domestic funds have ESG mandates. “The Covid-19 crisis is clearly an issue that raises profound sustainability and social issues. There has, to our minds, never been a clearer issue for ESG investors to engage with.”
There are both international and domestic precedents for a sovereign state to issue a social bond, which are similar to green bonds as they “set objectives for the use of proceeds and monitoring and reporting structures”.
Guatemala issued a social bond, which was 15 times oversubscribed during Covid-19, raising $500m, with the money going towards investments in health and education, food security, and affordable basic infrastructure, the authors noted.
In SA’s case the money should be directed towards medical costs, including personal protective equipment (PPE), testing and quarantine facilities. It should also go towards economic costs, such as wage support, poverty relief including through social grants, and support for businesses through the government’s loan guarantee scheme.
Reminiscent of a ‘war bond’
The paper advocated for three separate issues to domestic institutional, domestic retail, and offshore institutional investors.
“This wide ambit allows for a marketing campaign with strong political, business and civil society backing in which the funding is marketed in a spirit reminiscent of a ‘war bond’,” it said.
The bond should be “ambitious” in targeting R100bn from across the three investor groups, the paper said, with R40bn sought from onshore institutional investors; R10bn from onshore retail investors; and R50bn from offshore institutional investors.
A social bond comes with reporting and governance requirements, and though this would mean an adjustment for normal government spending processes, the authors said that a social bond would not require too much detail.
The authors do, however, propose a “step-up” coupon — or a dual coupon that pays investors an additional spread on top of the standard coupon — should the government fail to deliver on the social objectives of the bond.
Though they did not recommend the proceeds be ring-fenced, they do propose a steering committee to set spending priorities, consisting of officials from the SA Reserve Bank, the National Treasury and the National Coronavirus Command Council. Reports and data would also need to be assured by an external auditor.