Generous interest rates for climate loans
• To help achieve a low-carbon economy, French charge 3.6% and Germany’s KFW charges 3%
The terms of the two €300m loans provided by German and French public development banks to support SA’s transition to a low-carbon economy are “highly concessional” and offer “more generous” terms than the government could have found in capital markets. The Treasury said on Thursday that the French development bank (AFD) loan will have to be paid back at an interest rate of 3.6% and Germany’s KFW loan at 3%. “The estimated cost for the government of SA to raise an equivalent loan today in the market would be around 8.9%,” the Treasury said.
The terms of the two €300m loans provided by German and French public development banks to support SA’s transition to a low-carbon economy are “highly concessional” and offer “more generous” terms than the government could have found in capital markets.
The Treasury said on Thursday that the French development bank (AFD) and Germany’s KFW loans each has a maturity of 20 years, including a five-year grace period. The AFD loan will have to be paid back at an interest rate of 3.6% (equal to the sixmonth Euro interbank offered rate [Euribor] plus 129 basis points) and the KFW loan has an interest rate of 3% (six-month Euribor plus 69 basis points).
“The estimated cost for the government of SA to raise an equivalent loan today in the market would be around 8.9%.
“This estimate is based on a fair value estimation of SA’s foreign currency bonds relative to the risk-free rate, secondary market activity and historical issue spreads,” the Treasury said. These loans form part of an international funding package of $8.5bn, known as the Just Energy Transition Partnership (JETP), pledged to SA by France, Germany, the UK, the US and EU at COP26 in November 2021.
It took almost a year for clear details of the funding package to emerge. President Cyril Ramaphosa told reporters at COP27 in Sharm el-Sheikh in Egypt that only about 2.7% of the $8.5bn will be provided by the partners in the form of grants.
The rest of the money will be loans and concessional loans from development and commercial finance institutions.
At the time of publication, the Treasury had not responded to questions from Business Day to confirm whether the money flowing to SA from these loans had already been allocated to just transition projects.
It did say in the statement that both loans are sovereign loans that take the form of nonearmarked budget financing that is transferred directly into the National Revenue Fund of SA.
“These loans are in support of the policy and institutional reforms undertaken by the government of SA in support of its just energy transition,” the Treasury said. SA’s Just Energy Transition Investment Plan, which was published last week, prioritises SA’s move away from coal for electricity generation and the development of new economic sectors for green hydrogen and electric vehicles.
According to the Treasury, the loans from France and Germany are already reflected in SA’s gross borrowing requirement, and the burden they place on the country’s finances is “well within SA’s risk benchmark of foreign debt as percentage of total debt”.