Last week South Africa received a $1 billion loan from the New Development Bank, the bank set up by the Brazil, Russia, India, China, and ourselves, often known as the Brics bank.
For South Africa, with its heavy debt burden and increasingly limited borrowing options, this was a godsend.
The loan, like the one for $1 billion extended by the New Development Bank last year, carries an interest rate well below what we would have had to pay in the markets. It is very long-term, has a generous grace period and carries no conditions for economic policy changes. The loan is for 25 years and carries a floating interest rate, which is currently about 1.25 percent.
The Brics bank and some of the other multilateral lenders are providing a much needed break for South Africa during a crisis. But the break cannot last much longer. There is now little near concessional finance available for the country as the special facilities have now almost run their course. The reality of tightening market conditions will soon hit.
Last financial year the loans from the International Monetary Fund, the New Development Bank, and the African Development Bank meant that the government did not have to borrow on global markets. That was highly fortunate as global market conditions were highly unfavourable and our bond market was almost in crisis last year. In March last year the 30-year government domestic bond went above 13 percent and the Reserve Bank had to intervene for a short period to provide liquidity.
In total the government received $5.3 billion last year from multilateral financial institutions, which was about R82 billion, amounting to around 12 percent, a significant share of the government’s total borrowing.
In July last year the New Development Bank lent us $1 billion at a floating interest rate of what now is about 1.45 percent, for 30 years, and a grace period of five years. The International Monetary Fund made a $4.3 billion five-year loan at a little above one percent to help South Africa over the Covid-19 economic downturn, and the African Development Bank lent R5 billion at about 4.5 percent for 20 years.
Apart from the almost concessional terms of this money, the other big attraction was been that none of the loans carried economic policy conditions for disbursements. Unlike the World Bank, the International Monetary Fund in its regular lending, and other multilateral finance institutions, the Brics bank does not impose policy conditions to push borrowing countries to reform.
One big advantage for us and the other members is that the Brics bank has a credit rating above that of its individual member countries. It is therefore able to borrow at interest rates well below what the Brics bank shareholders are able to borrow on their own. So this is not a matter of subsidies, but rather good financial engineering.
The US $1 billion Covid-19 Emergency Program loan made to us last week is to support economic recovery from Covid-19. There are requirements in the loan that it should go to supporting the government’s plan to create 800,000 jobs. Importantly, the proceeds free up funds to support general government spending, salaries, and debt service.
All the Brics bank members were offered up to $2 billion in Covid-19-related loans and it is a no-brainer on whether to take this sort of money. The great benefit is that it helps lower borrowing costs and extends the maturity profile of debt outstanding.
Treasury was speaking to the World Bank about a Covid-19-related support loan last year that would have amounted to about $4.5 billion at 1.5 percent over five years, but the talks collapsed. Bloomberg reports that the talks foundered on the World Bank’s conditions to push forward economic reform. The World Bank wanted a cut in government salaries and loan conditions to ensure that none of the proceeds were used to bail out state enterprises.
Therefore, there can be no doubt that the Brics bank has helped take the government off the big policy reform hook.
The New Development Bank has become an important project lender to state-owned enterprises, including those in severe distress. Eskom, Transnet, the Development Bank, the Industrial Development Corporation, the Lesotho Highlands Water Projects, Toll Roads have all received loans from the Bank. Eskom has a loan for environmental clean-up at the yet-to-be-completed Medupi power station and for a large battery energy project. In total the Bank has a portfolio of about $4.3 billion in the country, much of it in loans to Eskom.
READ MORE Brics might offer agriculture markets South Africa needs
While most state-owned-enterprise debt carries a government guarantee, the Brics bank is highly exposed to distressed enterprises in South Africa like Eskom. It is unlikely that Eskom with all its problems could attract that sort of money from any other international development finance institution without policy conditions to ensure Eskom is put speedily on the right track.
The New Development Bank is a recent creation and only started lending five years ago. The rating agencies have rewarded it with investment grade ratings. It has big ambitions but it will be years before it can become a real alternative to the established multilateral finance institutions. It says itself that it has a supplementary role and will work with the World Bank. This year it aims to approve $10bn in loans, compared to the World Bank’s $28 billion.
When South Africa requires really big money it will have to go to the lenders that require policy changes. While the IMF and Brics bank don’t lend for the same purposes, if we were in a real bind we could obtain a total of $19.6 billion from the Fund.
Hanging over the Brics bank is the question of whether it is a Chinese-dominated body to give bailouts to political clients. The Bank’s loans are for long periods and do not have policy conditions but do have covenants which could be triggered. However, should Eskom’s position further deteriorate it is highly likely that loan covenants would be triggered. That could force some quick changes at Eskom to make it a viable entity. The first distressed loans will be a big test for the Bank. Domination by China is something that other shareholders, particularly Brazil and India are no doubt concerned about.
The bank is open to countries outside the BRICS grouping taking up shares and individual BRICS countries can expand their holdings. With the Bank headquartered in Shanghai, and China as a fast-growing financial power, there is a view which sees the Bank as ultimately becoming a Chinese alternative to the World Bank. Lobbying China and Russia for loan approvals could undermine the authority of the Bank’s technocratic staff.
Politically the Brics grouping is somewhat precarious as there is no compelling belief system that can hold the grouping together. Brazil, India, and South Africa are democracies, and the other members are authoritarian.
The original idea put forward by a Goldman Sachs economist was that Brazil, Russia, India, and China would become dominant players in the world economy by 2050. There was nothing in the idea to suggest a political grouping. or even a development bank. So the very viability of the Brics concept must still be tested.
But should China not overplay its hand, it could be a win-win for all in having a well-run development bank that will have to support economic reforms.
