Making the terms of the soft loans clear is a good idea

The Treasury hastened on Thursday to make it clear just how concessional are the terms of the €600m (R10.5bn) of loans France and Germany are to extend to the government on the strength of the policy reforms SA has undertaken to support the just energy transition.

It was a sensible move in light of the noise at home after the launch of the $8.5bn just energy transition package from the international partner group, of which these loans are part. There were tweets about the colonisers imposing debt on us and warnings that it could see SA go the way of Zimbabwe.

There were misgivings within the government itself about raising more debt too, and President Cyril Ramaphosa’s vocal calls for more grants rather than loans in part reflected that. The government is already spending a fifth of the revenue it collects to service existing debt. SA is at the southern tip of a continent that is at growing risk of debt distress and default, in a world in which financial conditions have rapidly tightened.

As it turns out, the two just energy transition euro loans are for 20 years, with a five-year grace period — which means government has to start paying them back in five years’ time. The interest rate is 3.6% in the case of the French loan, and 3% in the case of Germany.

By comparison, when the government borrowed $3bn on international capital markets in April, issuing 10- and 30-year bonds, it was at interest rates of 5.875% on the 10-year bond and 7.3% on the 30-year bond. The euro and dollar rates cannot be directly compared, but suffice to say by now, amid US Federal Reserve hawkishness, dollar strength and risk aversion to emerging markets, SA would be paying far more if it were to borrow on the market, where 10-year dollar yields are now over 8%.

If the Treasury is going to raise money internationally at all it makes sense to opt for cheaper concessional loans

— whether climate finance or any other kind — instead of borrowing on international capital markets at exorbitant rates. It has made clear it plans to do just that.

Where in the past there have been worries about conditionality, these loans — like the development loans the World Bank advances — recognise “prior actions” such as the government opening up the market to renewable energy, rather than imposing preconditions. But it will be important that the details, costs and conditions of all the components of the $8.5bn are transparent, especially since some of those loans are not concessional at all.

It is important too that the Treasury is keeping international borrowing within its self-imposed limits. That SA’s foreign debt is just 11% of total government debt is one of the main buffers it has against the kind of debt crisis being faced by other countries in Africa and Asia, where a fiscal crisis can rapidly become a balance of payments crisis now that the era of low inflation and low interest rates has ended, global debt costs are rising sharply and emerging markets have faced capital outflows.

Sri Lanka and Pakistan have lately become the poster children for debt defaults and IMF bailouts, with Egypt in and out of that category too. The IMF is warning of the risk of a broader emerging markets debt crisis. But it is Sub-Saharan Africa where much of the worry seems to be directed.

The IMF, whose recent regional outlook was titled “Living on the Edge”, estimates that 19 of the region’s lowincome countries are in debt distress, or at high risk of distress. Public debt across the region has reached 60% of GDP, a level last seen in the early 2000s before the so-called HIPC debt relief granted by advanced country lenders.

Now there are concerns that those mechanisms and that kind of collaboration are not working, in an environment in which China has become a large and untransparent lender to many of these countries.

But the narrative of Africa about to collapse under the weight of its debt in a global environment that has turned against it needs nuance. Certainly, the long era of cheap global money meant investors who never would have bought the bonds of “frontier markets”, including junk-rated African countries, were piling in, lending like there was no tomorrow, even where there were clear fiscal risks.

Private capital replaced the grants and concessional loan money low-income countries had historically relied on — and it deserves to take the fall to the extent that there was reckless lending. Equally though, countries that have so far got into distress and default did so at their own volition.

Zambia, which is already in an old-style IMF structural adjustment style bailout programme, managed to squander a commodities boom.

If Ghana reaches agreement with the IMF on a bailout programme, as it is desperately trying to do, this will be its 17th. It is a serial fiscal offender whose government has never been willing to say no to its electorate.

Many of the other at-risk countries are not at risk of default yet. But some have effectively lost access to international capital markets. When countries’ dollar bond yields hit more than 10%, the market deems them to be locked out, and some of these countries’ yields are already far higher than that.

This means when they need to repay their foreign debt in the next few years, they may not be

THERE WERE TWEETS ABOUT THE COLONISERS IMPOSING DEBT ON US AND WARNINGS IT COULD SEE SA GO THE WAY OF ZIMBABWE

IT IS IMPORTANT TOO THAT THE TREASURY IS KEEPING INTERNATIONAL BORROWING WITHIN ITS SELFIMPOSED LIMITS

able to refinance or roll them over — which is when the crunch will come. If global conditions remain tight, it may be a matter of time before that happens. That is why the IMF is offering help and urging distressed countries to come to it earlier rather than later. But it is also why many are concerned that the IMF and other multilateral lenders may not have enough funding available to meet the huge need.

As long as SA manages its public finances prudently and manages its debt carefully, taking advantage of cheap rates when they are offered and avoiding onerous conditions, it will not be in that basket. But it needs to keep an eye on its region, given that it is being looked to to provide leadership on Africa’s debt crisis — and that most of our big banks have sizeable operations on the ground in those countries and a direct interest in their fortunes.