DEBORAH CARMICHAEL: Now may be time for SA to turn to the East for debt funding

Given the state of global politics, SA’s shifting relationships in the world and the global goals to fund net zero, now may be the right time for our government to look more expansively for funding to ease its debt burden.   

SA’s debt burden is heavy. Its gross debt is projected to peak at 77.7% of GDP by 2025/26 — the highest in its 30-year democratic history. And SA spends a large portion of its budget on servicing debt, which means less for public services and infrastructure. Added to this, the cross-currency risks associated with this debt burden paint a bleak picture, especially if the rand continues to depreciate over this time.  

The dollar has been the de facto world currency since the 1960s and more than 60% of international currency reserves are held in dollar-denominated assets. De-dollarisation as a trend was heavily debated at the Brics summit in October last year.

While a Brics currency is probably still a pipe dream, alternative capital markets are starting to open up as many countries around the world look for alternative sources of funding, funding in domestic currencies, or funding in currencies that match the kinds of imports those countries have to make. Emerging markets risk currency depreciation relative to the dollar, which makes even concessional debt expensive to hold.  

With the US economy slowing in response to high inflation, the possibility also exists that a US financial crisis could cause a global economic meltdown. With global recession and heightened global geopolitical volatility predicted for 2024, many countries need to diversify their financial risk to be more resilient. In extreme cases countries that face sanctions or censure from the US but that were dependent on the dollar for trade, have heightened incentives to seek capital from other parts of the world.   

Panda bonds, or renminbi-denominated notes sold by non-Chinese issuers in onshore China, have now successfully been issued out of emerging African markets. This bond market is attracting new issuers, mainly because of lower funding costs, and one can easily see how this source of funding would be attractive to a net importer of Chinese goods, for instance by raising renminbi cash to pay for renminbi assets and offsetting those payment obligations on a currency-neutral basis.  

Issuance of Panda bonds by offshore borrowers in China’s interbank market topped 111.7-billion renminbi ($15.3bn) in the first three quarters of 2023. Landmark deals included the first African sovereign and sustainable Panda bond, from Egypt, which was backed by the African Development Bank and the Asian Infrastructure Investment Bank.

This deal was facilitated and made possible by guarantees from multilateral development banks. The combined guarantees from the two multilateral development banks with triple-A ratings helped both to secure the investors and allow Egypt to obtain competitive terms for the transaction.  

Egypt will use the bond proceeds for inclusive growth and green objectives under its Sovereign Sustainable Financing Framework. The framework, which was launched ahead of the COP27 climate conference held in Egypt last year, targets sustainable development through investments in clean transport, renewable energy, energy efficiency, sustainable water and wastewater management, financing for small, medium and micro enterprises, and essential health services initiatives. 

Other countries that have issued Panda bonds include Poland, the Philippines, Portugal, Hungary and South Korea. There was some speculation that Kenya would look to raise renminbi money in the same market, though it raised Samurai bonds (another option for SA) in the Japanese market instead. China, like SA, has a capital control regime and so any funding raised in this way would need to be specifically used. 

The private sector in Germany has also been a supporter. Deutsche Bank issued its second Panda bond to raise 1-billion yuan ($141m) for its general business activities and development in December, and German carmaker Volkswagen, which has had a presence in China since the early 1980s, in September issued a debut 1.5-billion renminbi 3.05% two-year Panda bond. The carmaker has also expanded its renminbi funding channels through offshore Dim Sum bonds. 

This year may present the ideal opportunity for SA to shift its funding focus to the East. Such a move could mitigate some geopolitical and currency risk, and — considering the deteriorating fiscal situation SA finds itself in — may assist the country to avoid a fiscal cliff on the medium-term horizon.  

It may be time for the SA government to realise that it can no longer pin the health of the economy on a greater dependence on the US. There are alternatives. SA has already shown its expanding outlook and desire to reach new markets with the issue of the rand-denominated Islamic (sukuk) bond in November 2023. The Islamic bond was the second such issuance for the National Treasury.

China is obviously another desirable untapped market for us, and while this kind of market access is not without its challenges — China’s strict exchange control regulations being one of them — it may still present an interesting option in increasingly uncertain times.  

• Carmichael is a partner at global law firm A&O Shearman.