Loans related to climate may whet state appetite for more

One rich country diplomat tells how when he arrived in SA in 2019 and suggested that his country’s development finance arm might be keen to make some cheap finance available to the government to support its energy transition plans, he was quite firmly rebuffed.

“Didn’t your predecessor brief you that the SA sovereign doesn’t borrow from international financial institutions?” he was asked.

SA has come a long way since. The Covid-19 pandemic combined with the climate imperative to drive a policy shift which proved to be more fundamental than was evident in mid-2020, when the government reversed its 25year-old decision not to borrow from international financial institutions and raised a $4.3bn loan from the IMF.

It was the depths of the Covid-19 crisis. The government had to raise a huge amount of money to fund a spiralling deficit at a time when financial markets were making it hugely expensive to do so. The IMF and other international institutions were making hundreds of billions of dollars available at below-market rates to help countries through the crisis and its aftermath. SA would have been rash not to take advantage.

Since then the government has raised more than $8.7bn (R145bn) of loans from the IMF, New Development (Brics) Bank, African Development Bank and World Bank. The loans are for up to 30 years at rates well below what SA would have to pay on the market for such long-term finance, and they come with three to five-year grace periods.

The Treasury said in February it planned to borrow $11bn on the market over the next three years and would seek to replace some of its expensive market loans with cheaper loans from international financial institutions.

We can expect an update in next month’s medium-term budget announcement. But where it gets really interesting is at the interface of the government’s borrowing to support the budget and the borrowing SA is going to be doing under the $8.5bn Just Energy Transition Partnership (JETP).

SA’s climate finance team, led by Daniel Mminele, is finalising the investment plan, which has to go to the cabinet and to the partners — the US, UK, Germany, France and the EU — for launch at the COP27 climate summit in Egypt in November. SA wants to direct the money on offer to three programmes: electricity, including strengthening the transmission grid to support more renewable energy and repurposing old coal-fired power stations, electric vehicles and the hydrogen economy.

The plan is likely to be programmatic rather than project-specific, setting out which programmes will merit JETP allocations — and which won’t, even if they are part of SA’s broader energy transition plan. It’s still not clear how much of the $8.5bn will be grants and how much will be loans, nor how much of the funding will go to Eskom and other agencies and how much to the government directly.

What is clear though, is that the JETP can only cement SA’s international financial institutions policy shift, and broaden the range of international institutions from which the government is willing to borrow. For example, the German development finance institution KfW is understood to be in talks with the government on a €300m climate-linked loan; so is its French counterpart. Talks on those loans predated the $8.5bn but they will be included in the package, so €600m (R10.3bn) in concessional loans would be disbursed directly to the government.

By contrast, the World Bank loan for the decommissioning of Eskom’s Komati power station is not part of the $8.5bn. The amount is still under discussion, but in January, the bank mentioned $250m and it could be as much as $300m. It will go directly to Eskom. But it will be the third World Bank loan to SA this year, after a $750m loan for general budget support in January and a further $480m loan in June to cover Covid vaccines.

Both of those were sovereign borrowing, directly to the government. And that’s the essence of the policy shift of the past three years. This might have been the first time SA borrowed from the IMF but it had borrowed from the World Bank and other international financial institutions before: the difference was that those were loans to Eskom or other entities, not to the sovereign.

SA shifted its stance out of necessity, but also to take advantage of international lenders’ appetite for lending to it — first on Covid-19 then on climate, where the JETP is being looked to as a model for other fossil fuel-dependent emerging markets too. But there are still risks. Conditionality is one. That had always been the democratic government’s big worry about borrowing from international financial institutions, going back to the days of the “Washington Consensus”, when lenders tended to impose conditions on sovereign borrowers that were economically tough and politically contested.

These days, however, the borrower supposedly is in the lead. Loans are made to countries based on their own programme of structural economic reforms, or in the case of the JETP, SA’s own plans and commitments to transition to cleaner, greener energy.

But skilled negotiating is needed, especially given how politically contested those reforms and energy plans are within the government.

The bigger risk is that however cheap the loans and attractive the terms, this is still foreign borrowing.

Since democracy SA has been careful to keep a lid on foreign borrowing and avoid the trap other emerging markets have fallen into when they borrowed too much abroad and ran out of foreign currency to repay it. It is fortunate to have a well-developed domestic market where the government can do most of its borrowing.

The international financial institutions loans are just a fraction of total government borrowing of R4.5bn, and the government’s foreign borrowing is still only about 11% of that total, which is within its selfimposed limit of 15%. But it has edged up from about 9% five years ago. In a volatile global environment in which emerging market currencies such as SA’s are vulnerable, the mix of foreign and local loans is still one to watch with care.

SA SHIFTED ITS STANCE OUT OF NECESSITY, BUT ALSO TO TAKE ADVANTAGE OF INTERNATIONAL LENDERS’ APPETITE FOR LENDING TO IT