HILARY JOFFE: SA breaks borrowing taboo for the sake of cheap money

Barely a month into its first Covid lockdown SA did a major policy about turn. From the birth of democracy the new ANC government had insisted that SA run its public finances so as to ensure it could control its own economic destiny — and stay well clear of borrowing from multilateral lenders such as the IMF and World Bank, which might tell it what to do.  

Then, in March 2020 Covid sent the economy and markets into free fall. And as the government prepared to spend billions on a relief package just as tax revenue was tanking, the president and his finance minister announced that SA had approached the multilaterals to source $7bn in funding to support the budget. This was hardly more than an eighth of the government’s enormous borrowing requirement for the year, but politically it was a big shift.

Not that the government had that many options. Foreign investors were fleeing SA’s bond market amid global turmoil and a ratings downgrade, with the Reserve Bank forced to intervene just to keep the market functioning. The rand had crashed; the cost of borrowing 10-year money in the bond market had spiked.

Meanwhile, the IMF and World Bank responded to the health and economic crises by pledging hundreds of billions of dollars of cheap emergency loans to hard-hit countries  — without the strings they used to attach with the much-maligned structural adjustment programmes of the 1970s and ’80s. The New Development Bank (NDB) and African Development Bank (AfDB) were stepping up too. It wasn’t the first time some of these institutions had made project loans to SA. But it was certainly the first time they’d lent money for general budgetary support.

Swiftly, SA raised its full quota of $4.3bn from the IMF via the fund’s rapid financing instrument. It raised $2bn in two tranches from the NDB, which disbursed the same amount to each of its five member countries, as well as $300m from the AfDB. It was also meant to raise $2bn from the World Bank. In the event the bank was last to the party, approving a $750m development policy loan to SA only this week.

More than 20 months on, the taboo on that kind of borrowing is largely gone. But it may be hard to see why SA still needs the money and is looking to source more of it, especially at a time when things are looking so much better. A global commodities boom came to SA’s rescue. The economy is recovering. The fiscal deficit finance minister Enoch Godongwana will announce in his February 23 budget is likely to be better even than November’s medium-term budget indicated.

Economists project a medium-term revenue overrun of anything from R150bn to R190bn, with the government’s annual borrowing requirement subsiding to levels well below those seen at the peak of the Covid crisis. Before this week at least, markets had been “risk on” over the past couple of months, favouring emerging markets such as SA, causing the rand to strengthen and the cost of 10-year borrowing, as reflected in rand bond yields, to trade down below recent peaks and far below early Covid peaks.

Yet SA’s cost of borrowing in real, inflation-adjusted terms is still one of the highest in emerging markets, mainly because investors see our fiscal outlook as so uncertain. The government is spending more on interest costs than it is on health. Multilateral lenders can offer far lower interest costs: the Treasury’s sense is it got the 10 year World Bank loan at an interest rate that is three to four percentage points lower than it would pay to raise dollar funding on international markets (though it plans to do that soon too).

Treasury deputy director-general Duncan Pieterse notes that even a one percentage point shift from current rates means many billions of rand saved on debt service costs. “To the extent we are able to access highly concessional funding it has to be something we keep considering; the benefits are enormous,” says Pieterse.

These institutions can lend cheaply because their own cost of borrowing is so low, reflecting their high credit ratings. The IMF is a triple A while the NDB is a double A plus — seven notches better than SA’s subinvestment grade double B minus rating, notes NDB vice-president Leslie Maasdorp. “It makes sense for SA to tap into some of this funding because the terms are so preferential,” he says.

Economists said this week that the loans could serve as a lift to confidence: “It improves sentiment because it’s a bit of a statement that you’re back in the international community. Investors like that,” says RMB economist Kim Silberman.

They may also like what one calls the policy contingency built into the loan, even if some are bemused by the “major breakthroughs” in SA’s structural reform programme that the World Bank’s loan documents say were the basis for the loan.

But what of that contingency, or conditionality? These loans, especially the emergency Covid loans, are not conditional in the old sense. But that doesn’t mean no commitments are required. Those will generally be to policies and reforms countries have already embarked on of their own accord, not measures imposed by the multilaterals. The conditionality is in a sense backward looking, rather than forward looking. But the loans are policy linked rather than project linked. And countries do have to show commitment, even evidence of delivery, to land the loans. 

For the IMF emergency loan SA and other countries each had to agree letters of intent with the fund on fiscal prudence, good governance and economic recovery measures. The World Bank loan, a development policy loan, required even tighter commitments or so-called prior actions on implementing long promised reforms, as well as on pro-poor spending to mitigate the impact of the pandemic.

By all accounts there were tough talks over what SA would, or even could, deliver by way of prior actions, with broadband spectrum a particular sticking point. In the end the bank gave SA recognition for those “breakthroughs” — in electricity, specifically on embedded generation, as well as on climate change and, rather unexpectedly, on digitising the special R350 Covid social grant process and the electronic vaccination data system. It gave SA recognition too for its Covid-related spending.

The World Bank can’t take the money away if SA backslides on reforms. But it could certainly decline to lend any more money — which could be an issue since SA requested a further $800m loan to finance its existing vaccine contracts, and a $250m investment in the decommissioning of the Komati power station. SA is also negotiating big project loans from the NDB, which has already committed a total of $5.4bn to SA — including the $2bn already disbursed for Covid health care and economic recovery spending — and could look to more.

The taboo may have been broken, the money looks cheap, and in an environment of rising global and local risks, the multilateral loans may provide some protection. But SA will have to be more careful than ever that it can negotiate terms it can live with — and spend the money wisely.

• Joffe is editor at large.